Hard Money Loans: A Quick Guide to Fast Financing

How Does a Hard Money Loan Work?

Hard money lending works in similar ways to other loans. But a few essential elements make it a unique transaction. Let’s have a look at them:

1. The Lender: A private investor interested in the real estate sector can offer funds in hard money lending. Lenders like Kiavi offer real estate investors different types of loans to help finance the investment.
2. The Loan Interest Rate: Be ready to pay at a high-interest rate. The average interest rate on a hard money loan is between 7% and 15%.
3. The Duration of the Hard Loans: A hard money loan has a shorter term period compared to conventional loans. You can qualify for private hard money loans that can last a few months or a few years.
4. The Value of the Investment Property: Hard money lenders evaluate the value of the investment property to ensure it meets their criteria. They will issue you a loan for a percentage of the property’s value. This percentage is known as the loan-to-value ratio (LTV).

What is a Hard Money Loan Example?

Suppose you’re an investor looking to purchase a property. You want to sell it as a flip, but the home is in poor condition.

You need enough cash to finance the purchase and cover renovation costs. Traditional mortgage lenders and banks will not sanction a loan looking at the home’s condition. A hard money lender can come to your rescue in this case.

They will evaluate the property to determine the loan amount that can be sanctioned.

Let’s assume you wish to purchase a property at $100,000 and sell it at $200,000 after renovations. The lender may offer you a fix-and-flip loan of up to 70% of the property’s After-Repair Value (ARV).

If the lender determines that the ARV is $200,000, they might provide a loan of $140,000 (70% of $200,000).

Now, the hard money lender will decide the duration and interest rate of the loan. They can propose a 12-month duration at a 12% interest rate. After using the hard money financing to fund and re-sell the house, you can repay the lender with interest.

Types of Hard Money Loans

Hard money commercial loans can be different kinds with each type benefitting a specific kind of investment. Let’s have a look at some of them to understand different kinds of hard money loans:

1. Fix-and-Flip Loans: House flippers use these short-term loans to purchase homes, renovate, and re-sell them at a profit. Fix-and-flip loans provide funds for both the purchase and the renovation. Here the property itself serves as the collateral.
2. Bridge Loans: Bridge loans help buyers purchase homes while selling their existing properties. These loans act like a bridge when the buyer cannot afford to buy a home while selling their current home.
3. Construction Loans: Hard money construction loans are given in parts as the construction progresses instead of giving a lump-sum amount. Once the construction is complete, a portion of the loan amount is used to help purchase the property.
4. Cash-Out Refinance Loans: Investors can use existing home equity to refinance their current mortgage into a loan. The cash-out refinance loan is beneficial when purchasing an investment property or renovating a home.
5. Land Loans: Land loans are loans used to fund undeveloped land without any constructed home. There are various types of land loans that people can choose from. But, the interest rate of land loans is higher than other loans as it is a risky venture.

Who Benefits From Hard Money Loans?

Hard money real estate loans come with higher interest rates and fees. But they are popular amongst investors because of their perks.

Additionally, hard money lenders don’t have strict underwriting guidelines. They may be willing to work with borrowers with poor credit or financial histories. Let’s have a look at some of the individuals who benefit from hard money loans:

1. Real Estate Investors: People who wish to invest in real estate but lack funds can benefit from hard money loans. You can get loans for ventures that a conventional mortgage lender will not fund.
2. Flippers: Home flippers require a lot of money to flip a property. They not only need money to buy the house but also to repair and sell it. Hard money lenders can help flippers. They have fix-and-flip loans that give flippers enough funds to do their flip without any trouble.
3. Developers: A developer who wishes to construct a commercial property or build it can use hard money loans. They can either apply for land loans or construction loans based on their requirement. Like other hard money borrowers, they should prepare to pay exorbitant interest on the loan.

👍 Pros of Hard Money Loans

• Quick Approval Process: Hard money loans can get approved quickly in a few days to weeks. Their underwriting process is shorter than traditional mortgages.
• Flexible Loan Terms: You can apply for hard money loans between 12 months and 3 years. There is no rigid term that you have to adhere to like you have to with banks. The loan term depends on the type of loan you’re applying for.
• Your Credit Score Does Not Matter: Hard money lenders sanction your loan based on the property you provide as collateral. They do not evaluate your loan based on your credit score.

👎 Cons of Hard Money Loans

• Extremely High-Interest Rates: The average interest rate on hard money loans is 7% – 15%. Hard money loans are expensive because of the risks involved in real estate investing. The lender has to get back the money they lent, whether your investment was successful or not.
• Short Loan Terms: You may get the hard money fast, but you have to repay it quickly too. Hard money loans have shorter loan terms than traditional loans. You need to ensure that you earn enough money from your investment to pay back the lenders.
• Risk of Losing Your Property: If your investment isn’t successful, you risk losing the property to the lender. Remember, the investment property is used as collateral in a hard money transaction. Your property will compensate your dues in case you fail to pay on time.

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Final Thoughts

Hard money loans are quick loans for real estate investing. If you’re a real estate investor looking for fast funding options, these loans might be the right choice. 

You can apply for a particular type of loan depending on your requirement. For example, if you want to invest in land, then you can apply for a land loan.

However, you should prepare thoroughly if you wish to apply for hard loans. These loans have certain shortcomings for which you should plan in advance.

But despite its cons, it offers quick benefits that make hard lending money useful for real estate investment.

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