10 things to Know About Hard Money

With hard money growing in popularity among real estate investors, you may be interested in using a hard money loan in your next real estate investment. Here are ten things to know about hard money investment before you start working with a lender.

1. Hard money uses property as collateral: A hard money loan is a loan that uses physical property as collateral–so in the case of real estate it is the real estate itself. This is the major feature distinguishing it from traditional loans and why in some cases can seem predatory to an outsider as the lender gets the property if the buyer cannot pay.
2. You can lose the home: one major factor to consider when using a hard money loan
   is that the property is used as collateral, so if you are unable to pay the lender takes the home. This is not unlike a foreclosure on a mortgage with a bank. Despite how stressful this could sound, this shouldn’t be an issue if you are buying within your means and plan to use the property for income or as a flip.
3. Hard money lenders aren’t interested in your history: because the property is there as collateral, hard money lenders are not as interested in your financial history as banks offering traditional loans. However they will want to see what equity you have in the property.
4. Your interest will be higher: because hard money loans also usually have a shorter period, they also have a higher interest rate. While traditional home loan interest rates run in the 1-3% range, hard money loans typically have an interest rate of about 7-10%. This rate is usually there to protect the lender and cover other costs such as insurance and taxes.
5. You can close quickly: compared to traditional loans through a bank which can take up to two months to become available, hard money loans seem almost instantaneous. You can expect to be approved in just a few days with funds ready in as little as 10 days. This makes them a great option in a competitive real estate market where sellers want to close quickly and buyers abound.
6. Hard money loans are short term: hard money loans are based on a short fixed period that usually span from six to 18 months. Since the interest rate is higher than a traditional loan, paying it down as quickly as possible will save you thousands of dollars, and the short lending period accounts for that in your hard money investment.
7. You can get a hard money loan for most types of property: while hard money loans are most typically used for residential property, you can use a hard money loan to back other types of property, from commercial to land loans to construction.
8. Interest rates vary by region: because you don’t get a hard money loan through a bank but a private individual or company, interest rates are going to be determined by competition. Hard money loans are popular among real estate investors in California, driving down interest rates compared to other states.
9. Your loan depends on your loan to value ratio: Your loan to value ratio, or LTV, is what determines how much your lender can give you. This ratio is calculated by dividing the loan amount by the value of the property. You can expect to receive around 65-75% of the property’s value. While considered a little riskier, in cases of a flip you can also ask about basing this on the ARV, or after repair value. In this case you can expect a higher interest rate.
10. There are requirements for the borrower: While you are more likely to be approved for using a hard money loan than a traditional loan, most lenders will still have requirements for you to meet before you get approved. Lenders will be most concerned with the amount of equity you have invested in the property, but they may also want to know your plan for the property down the line, whether that’s how you plan to fix it or sell it.