- 3 min read
- Hard money lenders are also known as private lenders.
- Hard money loans are usually short-term loans that are funded quickly.
- Hard money lenders are typically local individuals who seek high returns on their investments.
Hard Money Lenders Fund Savvy Investors Who Need Short-Term Loans for Real Estate Deals
Hard money lenders specialize in different types of hard money loans. Before we focus on hard money lenders, let’s look at the different types of loans hard money lenders offer.
The uses of hard money loans vary, but the common characteristics of a hard money loan are:
- Short term
- High interest rate and closing costs
- Private, local lender
- Short time to closing
Hard money loans are not meant as alternatives to conventional, long-term home loans offered by banks, credit unions, and mortgage brokers. Instead, hard money loans are intended for tactical use and to solve a short-term problem. What problems can hard money loans solve? Here are a few uses of hard money loans:
Construction Pay Off
A loan relieving spec home builders of construction loans when their property does not sell when anticipated.
Bridge loans are also called short term financing, swing loans, interim financing, or gap financing. A bridge loan provides immediate cash for quick closings, to make an advantageous purchase (perhaps of an under-valued property in a foreclosure auction), or to help a borrower avoid a default.
A loan to acquire raw land. Loans for raw land are difficult to find at soft money lenders.
A loan to prevent a foreclosure in a situation where the owner is in negotiations to sell the property, but the owner’s lender is driving towards an expedited foreclosure.
Takeout or Standby Loan
Agreement to lend money to a borrower upon the completion of a project’s construction.
Buyers of foreclosed properties who anticipate repairing the property and selling it quickly (flipping) use hard money loans to fund their purchases.
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Hard Money Lenders
Hard money lenders are usually private individuals or limited partnerships where the lenders see investing in short-term real estate deals as a good way to earn a higher return on their money than through stocks, bonds, or other investments. A common rule among hard money investors is to visit the property they are asked to invest in to gauge its value. As a consequence of this rule, most hard money lenders operate within a limited geographical area.
Hard money lenders will limit the amount they lend to a fraction of the property’s LTV so that in the event of a foreclosure, they recover most or all of their principal.
Most hard money lenders do not have storefront properties or advertise in the same manner as banks or credit unions. To find a hard money lender, call mortgage brokers who may have a list of private investors they have worked with in the past. Also, check online by entering your city or state name and "hard money lender" into your favorite search engine.
|Soft vs. Hard Money Loans|
|Soft Money||Hard Money|
|Also Known As||Mortgage or deed of trust||Private money or bridge loan|
|Purpose||Purchase residence by owner-occupant or a long-term investor.||Purchase distressed or REO property that requires moderate amount of remodeling.|
|Loan Amount||Up to 95% of fair market value.||Up to 70% of after-repaired value.|
|Typical Term||15 - 30 years||6 - 24 months|
|Interest Rate||Varies||Varies, often double current soft rates|
|Points||1 - 3||2 - 10|
|Credit Score||~620 FICO for FHA, but varies||None|
|Time to Funding||>30 days||<30 days|
|Source||Broker or direct lender such as a bank||Local private investor|