Hard money is a way to borrow money, for real estate purposes, without using a bank. Instead loans come from individuals or investors who lend the money using the property as collateral. Hard money is a great option when traditional lenders will not approve funding or when you need money quickly.
Waiting for approval, from a traditional lender, is a gut-wrenching, painfully slow process, even if you have plenty of income and a great FICO score. However, if you have any negative mark or an income that makes the lenders hesitate, the process can take even longer and there is a huge chance, you won’t even get approved.
Hard money lenders are different than traditional banks; they lend based on the collateral that is securing the loan. This allows them to not worry so much about the ability of a borrower to pay back the loan. Hard money lenders know that if you default, they can take the property and sell it. Therefore, the value of the collateral is more important than your financial situation or credit score.
Typically, hard money loans are short-term loans that last between 6 months and 3 years but can stretch longer if necessary. They also have higher interest rates than traditional loans.
Why Would You Use Hard Money?
Why would you use hard money, when it’s more expensive than other options? There are numerous reasons to use hard money. Since the lender is heavily focused on the value of the collateral versus your finances, hard money loans are closed much faster than traditional loans. Typically, these loans are closed within two weeks of application. Lenders prefer not to take possession of your property, but they won’t spend a tremendous amount of time picking through your financial records. The relationship is very important in a hard money loan. Once you have a relationship with your lender, the loan process moves even quicker; this gives you the power to close deals much faster than other investors. The ability to close quickly is a huge bonus when dealing with a property that has many offers.
Hard money loans are considerably more flexible than traditional loans. Hard money lenders evaluate each deal individually, instead of using a standardized underwriting process. This allows flexibility with repayment schedules. Because this is an individual you are working with instead of a corporation, it is easier to hash things out.
Hard money makes the most sense for a situation where a short-term loan is needed.
A good use of hard money use is for fix and flip properties; Investors buy a property, rehab it and sell it for a profit; allowing them to sell the property quickly and make a profit. Individuals with poor credit can use hard money to buy their home, but it would be smart to refinance as soon as possible.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.