Is Hard Money Lending the Right Option?

Hard money loans are a unique source of capital for small businesses. They offer very rapid funding and don’t rely on your credit history, so they might be a great fit.  But they also carry higher fees than many types of financing, so it’s important to make sure they really are the right option for your needs.

What is a Hard Money Loan?

A hard money loan is a short-term, high-interest asset-based loan, through which a borrower receives funds secured by real property, like real estate or equipment, which is used as collateral. The interest rates on hard money loans are typically higher than conventional commercial property loans, starting at 7.7%, because of the higher risk for default and shorter duration of the loan.

Hard money loans are only given to commercial borrowers in order to avoid falling under the overview of Dodd-Frank, which monitors most forms of real estate and asset-based lending given to individual borrowers. Because of this they are typically issued by private investors or companies, and rarely by publicly traded banks.

Who is a good fit for a Hard Money loan?

There are a couple of different aspects that make a person a good fit for a hard money loan.

Need for Speed

Usually, a person seeking a hard money loan will be someone who needs financing immediately, or in a very short time span. Banks have strict lending requirements and do thorough examinations of loan applicants. This can make approval for any loan a longer process. Additionally, banks must follow the rules set forth by the Dodd-Frank Act, which was put into effect after the 2008 housing crisis. Hard money loans are given by private lenders who have more leeway than banks and are not included in Dodd-Frank, they can be approved and funded much faster.

Poor Credit History 

Another good indicator that hard money loans will be a good fit for a borrower is their credit history. If a borrower has a weaker credit history they may be better suited to a hard money loan because lenders look at the collateral’s value, rather than their credit rating.

Short Term / Gap Financing 

Hard money loans are good for short-term investors because they can finance the purchases quickly.  Fix-and-Flip investors, who buy homes in need of repair and maintenance and then sell them for a profit once they’ve been improved are a great example of this.  The purchase and renovation of a property within 12 months through a single, short-term loan that offers interest-only payments are the perfect option for them because of the pace at which their business works.

Fast Portfolio Growth 

Buy-and-Hold Investors who will purchase a house in poor condition, renovate it, and then rent it out to tenants, are another example of this type of borrower. Traditional lenders won’t issue conventional mortgages for houses in poor condition, so a hard money loan allows them to acquire the property, renovate, and then refinance with a lower interest permanent loan once work has been completed.

Investors who would like to grow their portfolio of rental properties are another great fit for hard money. Because portfolio investors are highly levered, to begin with, they often rely on a hard money loan to make the additional property purchases before refinancing or paying off the loan.

What to consider when applying for a hard money loan?

There are a few things to consider before looking at a hard money loan. Is the money needed as quickly as possible, even if it means paying a higher interest rate? How large is the loan? Because hard money loans have a higher interest rate, a larger loan can have much higher costs, especially over an extended period of time. If the hard money loan can’t be paid off within a year than it might not be a good choice.

Finally, some lender might have specific requirements. They may want the property locations and purchase prices, or a CV detailing experience and prior projects. Some lenders may still want to check credit history, so they may require a credit score of 550+ and 2 – 3 months of bank statements in order to show a history of repayment on previous loans or credit.

Hard money loans are perfect for borrowers who need funding immediately, are looking to start a fix-and-flip company or are expanding their investment properties. If you are an investor and are looking to understand hard money options, we can help.

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