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What is a hard money loan?
A hard money loan is an asset-based loan. Unlike a conventional loan, which heavily weighs on the borrower's creditworthiness and overall ability to repay the loan in addition to the underlying collateral, a hard money loan focuses primarily on the hard asset or the investment property itself. Hard money lenders do take into account the borrower's credit score, income, and experience, but they are of lesser importance to them than they are to a bank.
Terms and rates with a hard money loan are far less favorable than with a traditional loan, with higherinterest rates in the 8% to 15% range and possibly with points, which is a small percentage (1% to 3%) of the total loan amount. For this reason, a hard money loan is typically used as a short-term loan or bridge loan that the investor can use for funding the property, fixing it up or getting it stabilized, then seeking long-term financing elsewhere or selling the property, if desired.
Why would you want a hard money loan?
Hard money lenders will finance properties most traditional lenders would not. Real estate investors typically use hard money loans to purchase investment properties that are vacant and in need of repair or aren't yet stabilized, which disqualifies them from being approved for traditional real estate loans.
These types of loans are very common for fix-and-flips or for investors looking to buy rental properties like a multifamily property that has a high vacancy rate or is in need of major repairs before the units can be rented. Since the approval process is typically much easier than it is with a traditional lender and hard money loans have much faster closing times, they offer flexibility for an investor who needs to close quickly or has a low credit score.
Where can you find hard money lenders?
Hard money lenders can be individual lenders or small businesses. Each one will have different requirements for their lending criteria, such as minimum credit score, property value, loan to value (LTV), or experience level.
You can find hard money lenders by:
- Googling "hard money lender" with your city or state name (Example "Hard money lenders in Tampa, FL).
- Attending your local real estate investment association (REIA).
- Checking websites specific to investing or general business websites, like LinkedIn.
- Asking a real estate agent who specializes in working with investors.
Before taking out a hard money loan, real estate investors should consider the financing cost and whether it's worth it for the specific investment property in today's market. Ask your lender what their lending guidelines are and what the funding process is like for their company, and begin developing a relationship. Having an established relationship between borrower and lender will allow you to close deals faster when you need to.