What is The Definition of Hard Money?

A hard money loan is a short term loan advanced to a borrower by an individual investor or company, backed by a real asset used as collateral for the loan. These type of loans are issued by private investors or companies to fund real estate transactions.

Investors such as property flippers, use hard money loans to renovate and resell real estate properties, and use the properties as collateral for the loan.

A hard money loan is often used as a way to raise funds quickly but at a higher cost and lower loan to value ratio. The loan takes a short time to get the funding.

The terms of the loan is often negotiated between the lender and the borrower. Repayment can at times lead to default, the lender can still profit by selling the property used as collateral for the loan.

Hard money loan amounts are based on the value of the property being used as collateral for the loan. It is not based on the credit scores of the borrower.

Banks do not issue hard money loans which is a preserve of private investors or lenders.

The higher costs of such a loan is often offset by the fact that the borrower tends to pay off the loan relatively quickly within a period of one to three years.

Hard money lending is a business model that can be practiced as an income generating alternative investment.

STEPS TO BECOMING A HARD MONEY LENDER

Hard money lending can offer several benefits for investors and if you are interested, there are a few steps you can take such as;

Start your business by obtaining the required insurance and licenses.
Create a legal framework for your business.
Research to identify your preferred lending targets.
Sign up to a peer to peer lending platform or network to search for possible investments and clients.
Try and assess any potential clients by calculating their loan to value ratio with regards to the offered collateral.

Types of HARD MONEY LENDERs

You may want to consider investing in hard money lending if you are:

Real estate investor: You are a real estate investor looking to grow your investment portfolio.
Career professional: You are in a profession with a great income or have surplus cash.
Retirement savings: You have a big retirement savings account.
Retired investor: You are retired and are searching for a passive income investment.
Trust fund: You own an estate or trust fund.
Successful business: You are a successful business tycoon or entrepreneur.
Lottery winner: You have won a huge lottery and have disposable cash.
Family and friend: You are able and willing to offer a helping hand to a friend or family member.

ADVANTAGES OF HARD MONEY LOANS

Quick and easy process

Since hard money lenders are not interested in your credit score or debts, you could access the loan in a few days or weeks. The lenders are only interested in how much value is in your collateral property or asset used in backing the loan.

No borrowing limit

You can get up to 100% of your needed financing from a hard money lender without need for a down payment.

The only fee you may be required to pay is origination fee and the monthly interest for the loan.

Building relationships

If you have a good history with a hard money lender of paying your loan back on time or early, the lender will most likely build a good working relation with you.

This may work to your advantage and they may be willing to loan you more funds, reduce origination fees and interest due, and the time taken to receive the loan.

Great for first time property investments

Hard money loans can allow you to buy property with very little funds of your own.

The loans are normally processed very fast and can be for as much as 100% of the purchase price of the asset you want to own.

DISADVANTAGES OF HARD MONEY LOANS

High above standard interest rates

Hard money loans charge a much higher interest rates when compared to normal loans.

Most hard money lenders charge double digit interest rates due to lack of financing options for potential borrowers.

The 10% to 20% interest charged is used as an incentive to have you pay back the loan quickly, to avoid default, and risk of losing your collateral asset.

Very high origination fee

Origination fee is a percentage of the loan charged as a fee by a hard money lender to process a loan.

Due to the risky nature of such an investment, the lender may charge as much as five times the amount a bank would normally charge.

Loan is short term not long term

Hard money loans are paid back within a few months or a few years due to the prevailing high interest rates.

Repayment terms and durations, depend on each contract signed between a borrower and a hard money lender.

Risk of losing property

Due to the higher than normal interest rates charged by a hard money lender, default in making payments due on the loan will put you at risk of losing the property used for collateral.

The loan is supposed to be a short term fix for your funding needs.

WHY USE a HARD MONEY LOAN?

Why would you consider a hard money loan if it is so expensive? Hard money loans offer;

Speed

A hard money lender is less concerned with your credit scores, income, or bank statements. You just need to put up an asset as collateral to access the loans quickly.

Flexibility

Hard money loan agreements are more flexible. Lenders do not rely on a standardized underwriting process.

Each loan deal is evaluated separately and depends on your situation. You may be able to alter terms like repayment schedules.

Quick approval

Provided you have a collateral, a hard money lender will give you a loan as much as the investment property is worth.

When you need to borrow against another property you own, that property’s value is what the lender will take into consideration.

WHERE CAN YOU GET A HARD MONEY LOAN?

Hard money loans can be easily obtained from hard money lenders such as groups of private investors, or from an individual investor with enough disposable income.

WHO uses A HARD MONEY LOAN?

Real estate investors

Hard money loans are more common in real estate transactions. Banks and other lenders would often rate such investments as being too risky.

Bad credit borrowers

Hard money loans are often preferred by individuals with bad credit scores who are unable to get funding from other lenders.

Despite the bad credit ratings, a good enough equity in a property may just interest a hard money lender, and convince them to give you a loan even with a bad credit history.

The costs associated with a hard money loan to the borrower is higher compared to getting funding from banks and other lending institutions.

This indicates the high risk the hard money lender is taking by offering you the financing.

A borrower is able to get a loan faster, an easy approval process, and potential flexibility in the repayment terms.

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