What is a Hard Money Loan?

What is a Hard Money Loan?

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What is a Hard Money Loan?Generally, when you invest in real estate and need financing, you might think you have two options: a conventional mortgage or hard money loan. Though most people understand the basics of a conventional mortgage, many may wonder, What is a hard money loan? Here are some common differences between the two types of loans brought to us by Investmark Mortgage.

What is a hard money loan?

Funding source

Lenders who fund conventional mortgages sell their loans to larger banks or to other investors. Private lenders mostly make hard money loans. The money may come from individual investors, lines of credit, or various types of investment funds. Hard money loans typically remain with the originating lender through payoff and the lender services the loan.

Time Frame

One of the biggest differences between a hard money loan and a conventional mortgage is the time to close. With a conventional mortgage, it usually takes several weeks to close. With hard money, you can usually close within a week, sometimes less.

Interest Rate<

Across the board, hard money rates are higher than conventional mortgages. This is due to the fact that hard money lenders are only loaning the money for short periods of time and not for 30 years where they would be collecting large amounts of small interest payments over time. You also pay higher interest rates on hard money loans because the lenders loan on distressed properties.

Property Type

Lenders offering conventional mortgages will typically loan on residential properties used for personal residences, as well as rental properties. These lenders place a larger emphasis on the credit-worthiness of the borrower, as well as the condition of the underlying asset. Properties that are distressed cannot be approved for a conventional mortgage. Hard money lenders lend for both residential and commercial properties, although they almost never lend money for owner-occupied properties or properties being used for personal or household use. Hard money loans are designed for distressed properties and are used by investors looking to buy and renovate, either to flip or refinance and keep as a rental.

Loan Term

Most conventional mortgages have interest rates fixed for 30-years and fully amortized over that period. Hard money loans are interest-only and typically have a term of 1 year or less.

Where to Find Hard Money Lenders?

The easiest way is to start with a Google of “Where to find hard money lenders.” A quick look and I found Hard Money Loans Directory published by BiggerPockets. Here you can browse by state.

I zeroed in on one on the top of the list for Missouri called Groundfloor Here’s how they describe their business:

  • Rates starting at 5.4%
  • Fix-and-flip hard money loans from $75,000 to $2,000,000 for residential properties
  • Closing as fast as 15 days
  • Monthly payments or balloon payment at maturity date
  • You can choose to roll all points into the loan
  • No personal guarantee required
  • Lend up to 70% ARV (after repair value)
  • Borrow up to 90% LTC (loan to cost)
  • Fast and simple application with minimal documentation (no tax returns, no bank statements)

You will find each lender has a criteria for making loans, and you need to apply and build relationships with the lenders.

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