Hard money is a way to borrow without using traditional mortgage lenders. Loans come from individuals or investors who lend money based on the property you’re using as collateral. A hard money lender uses a property as a “hard” asset and collateral. When loans are needed urgently, or when traditional lenders do not approve a loan, may be the only option.
Most loans require proof that the borrower can repay them. Usually, lenders are interested in your credit scores and proof that your income can repay a loan. If you have a solid history of borrowing responsibly and the ability to repay loans (as measured by your debt to income ratio), you’ll get approved for a loan.
Getting approved by a traditional lender can be a prolonged process – even with good credit scores and plenty of income. If you have negative items in your credit reports (or an income that is difficult to verify your lender’s satisfaction), the process takes even longer and invasive, and your application might not ever get approved. If you need a loan urgently, getting a loan from a traditional lender may not seem like a viable idea due to the reasons stated.
Hard money lenders take a different approach: they lend based on collateral securing the loan, and they are less concerned about your ability to repay. If anything goes wrong and the borrower cannot repay, hard money lenders can get their money back by selling off the collateral. The value of the collateral is more important than your financial position.
In the past, some bad apples tarnished the image of the hard money lending industry when a few predatory lenders provided hazardous loans to borrowers using real estate as collateral and intending to foreclose on the properties unethically. Fortunately, these types of hard money lenders hardly exist in today’s market (except for backdoor lenders). However, some residual stigma remains for some real estate investors who haven’t recently utilized a reputable hard money lender’s services.
The terms for hard money loans are usually contracted for a short-term – usually between 6 to 24 months, but the loan term can be extended to the longer tenure of 2.5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount of loan the hard money lenders can lend to the borrower is based primarily on the subject property’s value. The property may be one the borrower already owns and wishes to use as collateral, or it may be the property the borrower is acquiring.
Hard money lenders are mostly concerned with the property’s value rather than the borrower’s credit (although credit is still important to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property used as collateral.
Real estate investors would not want their loans for a long period of time because the interest rates are typically higher than traditional loans. One of the biggest benefits of choosing a hard money loan is the speed at which you can close. North Coast Financial Inc., the agents, can close your application in a matter of days, which is essential when trying to win the bidding war on a property for your upcoming project.
Hard money lending is only practical for short-term use. The borrower must have a good exit strategy in mind when they are applying for the loan. In Los Angeles, hard money loans of up to 3-4 years are often available to borrowers. The most common exit strategies include refinancing with a conventional loan or selling the property.