What is Hard Money

Explanation of Hard Money

 

Hard money is a type of loan that is secured by real property. Hard money loans are “bridge loans” and are usually given as short term loans. Generally hard money loans are used in real estate deals or transactions.The people who give or issue hard money loans are usually private companies and sometimes individuals.


How Does Hard Money Work


These loans are based on the value of the property. A loan-to-value or LTV is given against the property. Personal credit and track record or relevant experience are determining factors when a hard money lender decides to offer “terms” to the borrower. The borrowers personal credit isn’t as much of a determining factor when deciding if a borrower will be approved for a hard money loan. The personal credit of the borrower is usually a guiding factor. The personal credit can affect the “rate” or interest rate that the borrower receives. 


Hard money is usually an interest only loan with a “term” or length of the loan ranging from 6 months to 3 years. Usually the borrower pays monthly “interest only” payments until the loan is paid off. 


These types of loans are very common for “flippers” also known as “house flippers”. Real estate investors who usually purchase a single family home ranging between one to four units on average. They acquire a SFR or single family home that is distressed or needs remodeling. These house flippers then remodel the property and sell for market price once the remodel is completed. This is the reason why the industry standard length of time for hard money loans or bridge loans is usually 12 months. This gives the “flipper” time to purchase, renovate the property, and then sell.
Real estate investors who “flip” houses are willing to pay higher interest rates for this hard money because the terms are designed to accommodate the flipper. These loans assist the house flipper with buying, remodeling, and selling or flipping a house. Hard money loans usually require a lot less paperwork than banks and since hard money lenders are usually private companies they can be more flexible than traditional banks. One of the most important aspects is the fact that hard money lenders can close “fast”. Speed to closing can be an important component for house flippers. Many times, when a flipper finds a property to purchase there are other investors or buyers who want the same property. This creates a situation where the home seller can dictate terms. Many times the house flipper can get the opportunity to purchase the property by offering to close very quickly. The hard money lender gives a portion of the purchase price at closing and the real estate investor who is the flipper brings the remaining portion. 


When the transaction closes the hard money lender ends up with a lien on the property in what is known as “first position”. This means if the house flipper doesn’t pay the loan the hard money lender can foreclosure and take the property because the hard money lender’s lien is in first position on the property. This means that no one else has a lien over the hard money lenders first position.
Sometimes real estate investors will get another loan on the same property later after they purchase it. This new loan would usually go in “second position” on the property. The hard money lender who is in first position is the one who can foreclose on the property if the borrower doesn’t pay the loan as agreed upon in the contract that was originally between hard money lender and borrower or house flipper. 


In essence, the first position loan is a lien against the property as collateral to protect the lender if the house flipper doesn’t pay back the loan as agreed upon. This is the reason why hard money lenders are willing to take on the risk and lend money on real estate.


There is an entire industry dedicated to hard money lending. There are some hard money lenders who are real estate funds. These companies have raised a large amount of funds from investors, real estate investment companies, and even Wall Street. Many of these large lenders are giving hard money loans nationwide. 

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