Hard Money Loans

Hard Money Loans

What Is a Hard Money Loan?

A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of “last resort” or short-term bridge loans.  These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.

Pros and Cons of a Hard Money Loan

There are pros and cons to hard money loans related to the approval process, loan to value (LTV) ratios, and interest rates.

Pros

One advantage to a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other traditional loan through a bank or lender. The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant’s financial position. Lenders spend less time combing through a loan application verifying income and reviewing financial documents, for example. If the borrower has an existing relationship with the lender, the process will be even smoother. Hard loan investors aren’t as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.  

Cons

Since the property itself is used as the only protection against default, hard money loans usually have lower LTV ratios than traditional loans: around 50% to 75%, vs. 80% for regular mortgages (though it can go higher if the borrower is an experienced flipper). Also, the interest rates tend to be high. Another drawback is that hard loan lenders might elect to not provide financing for an owner-occupied residence because of regulatory oversight and compliance rules.

What Are Hard Money Loans Used For?

Flipping A House  Purchasing Investment Property Purchasing Commercial Property  Avoiding Foreclosure or Bankruptcy  Hard money loans can be a useful tool if you need financing through a less traditional route. However, these loans come with high rates and a significant amount of risk, talking to our Home Loan Experts to see if this is the option for your situation is advised.