What are Hard Money Loans?

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Hard Money and Private Loans

Hard Money Loans

Hard Money Loans are alternative forms of financing for real estate investors who are in need of fast financing and those investors who do not qualify for bank loans.  Hard Money Lenders are mainly concerned with equity and are pretty loose with credit, income, and other credit criteria.  Most Hard Money lenders require the borrower to have skin in the game by putting a lot of money down.  Minimum down payment requirements are 35% down payment on a purchase transaction and 65% Loan to Value on a refinance mortgage transaction.

 

Who Benefits from Hard Money Loans?

Hard Money Loans benefits real estate investors who need short term financing.  Hard Money borrowers are real estate investors who want to purchase a property that is not financeable by a traditional lender due to the condition of the property.  The Hard Money Borrower will purchase a property with hard money, do the rehab on the property, and will then either sell the property for a profit or will refinance it with an end loan from a traditional mortgage lender at a lower interest rate.

 

Interest Rates on Hard Money Loans

Interest Rates on Hard Money Loans are higher than traditional interest rates due to the risk involved by Hard Money Investors.  Typical interest rates on Hard Money Loans is between 12% to 15%.  There are normally points and fees charged with Hard Money Loans.  However, many borrowers of Hard Money Loans are gladly to get the loan and purchase a property that is not financeable, do the work as fast as possible, and then sell the property at a handsome profit.  For example, if a Hard Money Loan borrower borrowered $100,000 on a $200,000 investment home purchase and invested $50,000 to fix it up and sold it for $300,000 in six months, the 15% interest on the Hard Money is peanuts.  The biggest advantage of Hard Money Loans is that most Hard Money Loans do not have pre-payment penalties so you can pay it off at anytime.  The key with Hard Money Loans is that you should pay it as soon as possible to avoid paying the high interest rates.

 

Exit Strategy on Hard Money Loans

One of the key questions that you will be asked by a Hard Money Lender is your exit strategy.  All Hard Money Loans are short term financing and the key in using Hard Money Loans is for bridge financing.  Short term loans are where you will utilize hard money loans to purchase a property and resell it after you do some minor rehab or window dress it so the property can be financed by a traditional lender.  Or you may want to purchase a rental property where the property is not habitable nor lendable so you need to utilize a hard money loan to purchase the rental property, fix it, and then refinance your hard money loan into a conventional investment loan at a much lower interest rate.

 

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