Hard Money Definition: What it is, and what it’s good for!
You’ll notice across the web that all ‘hard money definitions’ have some variables; but knowing the whys and wherefores are key to using this kind of loan wisely. The following article provides real estate investing tips on hard money loans.
What’s Good for the Goose…
For a real estate investor, hard money loans will be secured by your real estate; and basically take the place of your banks and credit unions (traditional lenders). You do escape the lengthy application process it normally takes to purchase, and the extremely tough credit qualifications – which of course can make the difference between getting a deal, or not.
…is Good for the Gander!
While providing you with a quicker solution, these collateral based loans are actually more solid for the hard money lender; because if a deal goes south, they are more likely to get all their equity back. Why is that? First, they will base their calculations on current loan to value (LTV) And, they will base their calculations on current loan to value (LTV) without appreciation, or after repair value (ARV). Second, it’s because they only loan 60-75% of the purchase price.
The Pros and Cons of Hard Money Loans
What are the PROs?
- It’s fast; usually within a week vs. 90 days plus from lending institutions.
- Payments are generally interest only, with a balloon payment at the end.
- It makes good sense for shorter term loans.
- There are fewer stringent policies to deal with than at the bank.
- Some flexibility is available, depending on situation; while banks are set in stone pretty much.
- Down payments are not a requirement.
- Loans are 6 months to 5 years; great for fix and flips or buy and hold to give some time for the value to escalate.
- Approvals are more dependent on the property market value/condition than the borrower’s credit or financial position.
- When time is of the essence, you can ‘get in now’ and refinance later at lower interest.
What are the CONs?
- Hard money is more expensive; there are points, origination fees, and high interest (from 10-15%) added to the loan.
- Added points (from 3-5%) are a given; they are higher on the larger loans.
- Deal evaluations are more conservative, as the property is the only collateral.
- Hard money loans are not designed for joint ventures
- Not all property types work for hard money lenders
Generally funded by private investors (or syndicates thereof) the hard money definition you can count on is that it is ‘cold, hard, cash!’ Just what you need to show a seller you mean business when they need out of a property right now.