As traditional banks have backed away from lending, hard money loans became a fix and flip real estate investors best source of financing. However, most real estate investors don’t understand exactly what hard money loans really are in today’s market place. We’re going to help our readers understand the basics of hard money loans.
Hard money loan is a loan that is given based primarily on the asset used for collateral, sometimes called the “hard asset.” Hard money loans are unlike traditional bank financing that considers factors like a borrower’s income and credit score. This allows borrowers using hard money loans to take on more leverage than could of been supported with bank debt. While hard money gives borrowers more flexibility, it comes at higher interest rates, which could be as high as 8% to 13%. These hard money loans also have a shorter term than ban financing, about 12 to 18 months. Given that hard money loans are primarily based on the asset, these loans are underwritten more quickly, with loans being funded in a matter of days instead of months.
Hard money loans were previously limited to small, local private money lenders. However, with the proliferation of debt funds, the number of hard money lenders has greatly increased, with real estate investors now having access to much more capital.
Hard money loans are typically used by real estate investors looking to make a quick acquisition of a property. The fast closing nature of hard money loans are particularly useful for fix and flip investors, who are usually only given days to close a deal. Obtaining traditional bank financing in that tight of time frame is just not realistic, even if the borrower could qualify.
Hard money lenders will typically lend on all major non-owner occupied investment properties: single-family, multi-family, condos, townhomes, mixed-use commercial or even hotel properties. What really separates hard money lenders from traditional banks is that hard money lenders will finance non-income producing assets. This is a huge benefit for the real estate investor looking to capitalize on a value-add transaction, such as a fix and flip deal.
We wish there was a simple answer to this question! The reality is that the line is now blurred between hard money lenders and private money lenders. Both hard money and private money lenders provide the same services- quick closing, asset based underwriting and limited borrower diligence. No matter what you call them, both private money and hard money are the best options for fix and flip investors looking to make a quick purchase. For more information on hard money fix and flip loans, call us today or click here to apply.