What is a Hard Money Loan and When is it Used?

The hard money loan is otherwise known as a bridge loan or short-term loan, and can be used by real estate investors or house flippers who need capital quickly to complete the transaction. These loans are unlike a traditional bank loan for many reasons, and offer both borrower and investor a number of tangible benefits.

The following information will detail what is a hard money loan and when it can be used.

Convenience of the Hard Money Loans

Real estate investors and property flippers work on a very tight schedule. When time is money, getting the right loan can make or break the deal. Borrowers used to going to a traditional bank and waiting months for their money have discovered they can make use of the hard money loan and have the capital in weeks. The bank is removed from the equation with the hard money loan, as private investors become the funding source for the borrowers. The hard money lender is far more likely to also work with borrowers with less than stellar credit or minimal assets.

Now instead of being worried that the deal may fall through because the bank has not yet made their decision, investors provide the funding in far less time and now both borrower and investor win.

Ability to Offer Flexible Terms

If you tried to secure a loan from a local bank to complete a real estate transaction, the risk department offers very strict terms on how and when they need to be paid back. If you provide the investors of hard money loans proof the property is worth the investment, they can be more flexible in the terms of the loan. When borrowers show an investor that the ARV, after repair value, of the investment property leaves enough for both parties to make money, the investors are more likely to work around hurdles to make the deal.

Unlike the local banking institution, the hard money lender will be in the position to create a payment schedule more in tune with the borrowers needs, reduce the origination fees, and possibly eliminate the underwriting process.

Shorter Payment Schedules

If you have ever tried to secure a business loan from the bank, then you knwo the bank is in the business of making a substantial amount of money off their money. Not only are the interest rates excessive, the payment schedule can stretch out for years. The hard money private investor is looking to make money in less time, so shorter payment schedules can work for both parties. House flippers usually have buyers already on the hook and just need the capital to make the repairs to close the deal.

The hard money borrower usually has a date in mind by which they plan on paying back all the monies borrowed, and it is shorter than most loans. Whether purchasing a strip of commercial property and reselling it to a local developer, or buying and flipping houses each month, these borrowers are not looking for long-term loans, they need capital fast, and promise to pay the loan back in full plus interest in short order.

Various Types of Collateral

When you approach the local bank manager and their risk department for a sizable business loan, one of the big questions is what are you going to bring to the table as far as collateral. Most of the time, the bank will reject what you feel has monetary value, accepting only a few of the things you thought could provide backing for the loan. The bank offers money for the loan based on collateral provided. Unlike the local bank, hard money private investors see the big picture and realize there is plenty of money to be made. To secure the deal, these lenders will often be very flexible with the types of collateral used to back the loan.

According to Delancey Street, a private money lender, the private lenders analyze the ARV of the property, determine the length of the loan, and negotiate what they feel is adequate collateral differently for each case. In some instances, if the borrower is short on assets, their personal residence can be used to back the loan. In other situations, a borrowers retirement account could provide the collateral needed to secure the funding they require.

Hard Money Lending Conclusion

The hard money loans offer both the borrower and investor the opportunity to make money with less red tape. When funding is needed for a real estate investment, the hard money loans are the preferred choice for those flipping properties or buying large lots of commercial real estate.

Whether the borrower has very little business history or they are low on assets, flexibility of the hard money loans often help make these transactions a reality, and a lot of money for both sides of the table.

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