A lot of people wonder what hard money lending is. Hard money loans are secured loans that are used for commercial and residential real estate transactions such as construction, purchases, and refinances. These loans are usually asset based, meaning the loan is based on the value of the property, and most borrowers can secure a loan of up to 75% to 80% of the property value. Real estate investors and developers prefer hard money loans to avoid the lengthy loan approval process that is associated with conventional financing, or if the client is more credit challenged and their local bank declined their application. Although borrowers can benefit from receiving funds quickly, hard money loans usually have higher interest rates, and some bridge loans have a shorter term.
Hard Money Lenders
The key to hard money loans is that instead of heavily regulated banks, hard money loans typically come from investors or companies that specialize in hard money lending, such as a hard money mortgage company. However, innovative companies are stepping into the hard money lending pool as well. Some of these businesses pair well with certain segments of the mortgage financing industry. Construction companies offering hard-money loans, perhaps through a subsidiary, can ensure funding doesn’t get in the way of a potentially lucrative contract. Likewise, real estate agencies and boutique firms provide hard money loans such as bridge loans or fix-and-flip loans for high-end clients.
Another key part of understanding what hard money loans are is that they can also be used as bridge loans, filling the gap in between when the funds are needed and when the traditional loan can be approved. Developers building custom homes often owe the contractor an increasing amount of money as the project winds down, but a bank typically won’t lend a mortgage on an unfinished home. Borrowers planning to use the equity in a current property to make the down payment on a new property may need a bridge loan as will those selling lower liquidity assets to make a purchase.
Hard money loans may have higher interest rates with much shorter terms, but for the right borrower, hard money loans are the best way to move fast, fund quickly, and pay off before the interest costs more than the project’s profits.
Traditional, Soft Money Lending
Traditional lending, sometimes called soft money lending, is based on a lender or mortgage company using a portfolio of information such as your credit report, verified income, and current assets and debts to determine how likely you are to repay the loan. Qualification and terms of the loan are then set based on this calculation. For example, a borrower deemed less likely to pay may be charged a higher interest rate or be required to provide additional collateral. It can take weeks or months for a soft money loan to be approved and funded. These types of loans are typically provided with longer repayment terms and below-market interest rates. However, the approval process with a traditional lender can be an extremely slow process, even for those with a good credit history and substantial income.
What Do Hard Money Loans Typically Fund?
A common use for hard money loans is to purchase commercial buildings with the intent to make improvements, which would then yield higher rents. Once the renovations are completed, this would increase the value of the property and the investor would then refinance it into a conventional loan. By refinancing at a lower rate, the real estate investor would enjoy an increase in their monthly cash flow.
Benefits of Hard Money Loans for Lenders
While hard money loans can offer many advantages over traditional lending, there are other factors that borrowers should consider. With less regulations in private financing, it is imperative that the investor research their lenders or find a mortgage professional to guide them through the process. Most lenders have good intentions; however, investors should watch out for bait and switch tactics.
Additionally, hard money loans come with much higher interest rates than traditional property loans. Closing costs are also generally higher. This makes hard money loans less suitable for longer terms. This is why most hard money loan terms are for shorter time periods, usually no more than three years.
Benefits of Hard Money Loans to Borrowers
Typical hard money borrowers are not concerned with higher interest rates or shorter terms. Hard money borrowers are usually looking to get the deal done, and get it done quickly. The borrowers will already have a plan for exiting the loan. Hard money loans are popular with experienced fix-and-flippers. House flippers already have an idea of what improvements to make to a property, how long it will take, and how much it will cost, which means they also have an idea of how much profit a project will bring. When you have an opportunity to make a substantial profit in three months, but you must act now, the interest rate of the loan isn’t as important.
What Makes Hard Money Loans Different From Traditional Loans?
Hard money lending takes a much different approach. Rather than focusing on the borrower, hard money lenders primarily consider the value of the underlying asset, typically real estate or property. This offers several advantages. Without the need to document and review the borrower’s financials, hard money loans can be made faster and funded more quickly than traditional loans, allowing borrowers to close quickly on properties in competitive markets.
Hard money loans are also an easier way to borrow with non-traditional income, such as small business income, self-employed income, and even income from already owned properties. Traditional loans often require even more documentation when non-employment-based income is involved, which can create delays and possibly lead to rejection, even for successful entrepreneurs and real estate investors.
Hard Money Loans From GenWealth Capital Commercial
If you would like to learn more about securing a hard money loan for a real estate or development venture, contact GenWealth Capital Commercial today. Our private money lenders and mortgage financing brokers are here to discuss your commercial financing needs as well as what hard money lending is and how our services can fund your investment.