WHAT ARE HARD MONEY LOANS, Example, Rates & How-to Guide

What are hard money loans
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What comes into your mind when you hear the phrase “hard money loans”. Hard money loans aren’t the kind of loans you collect from your local or traditional bank. They are loans given by private investors, mostly for real estate investment. This article will guide you on what are hard money loans and their loan rates. It will also show you how do hard money loans work, also their lender, and some example. 

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What Are Hard Money Loans

A hard money loan is a type of loan that is secured by real property. Hard money loans most times are not what people consider first when trying to get a loan. Hence they are loans of “last resort” or short-term bridge loans. This type of loan is generally what is used in real estate transactions. However, the lenders are usually individuals or companies and not banks. 

Nevertheless, fix-and-flip investors are a good example of hard money users: they own a property just long enough to boost the value. Most times they don’t live there permanently. They often sell the property and repay the loan, usually within a year or so. Truly, people use hard money to get into a property and stay there, but won’t you want to refinance as soon as you can get a better loan? 

Furthermore, they are short-term lending instruments that real estate developers can use to finance an investment project. Indeed, it is usually a tool for house flippers or real estate experts whose goal is to renovate or develop a property, then sell it for a profit.  

How Do Hard Money Loan Works

Like we mentioned earlier, they are basically short-term loans, not more than one to five years. However, their interest rates are usually higher than they are for bank loans. Hence, no one would like to keep them much longer. 

However, the funding time frame for hard money loans is shorter when compared to the traditional financial market. Hence, lenders rely on collateral rather than the financial position of the applicant. 

Moreover, getting approval from a traditional lender is a painstakingly slow process. You usually need to get a good credit score and plenty of income. But even with great credit scores, if you have negative items in your credit reports, the process takes even longer. 

But you see, hard money takes a totally different approach. As said earlier, they prefer holding on to collateral. Indeed, they actually do no care about your ability to repay their money.

Hard Money Loan Rate

With the rate of inflation in the world today, the hard money loan rate would often follow suit. Let us take a look at the rate of money hard money loan between 2019 till date. 

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Hard Money Loan Rates In 2019 Till Date

The hard money loan rates in 2019 range from 7.5 percent to 15 percent. However, hard money loan lenders have the alternative to charge points on your loan also. Points are origination fees that include the administrative costs of the loan. Hence, it helps lessen any risk the lender may incur.

You should know that one point is equal to one percent of any loan. In a hard money loan, points center between 2 to 10 percent of the entire loan. The borrower pays it upfront with every hard money loan he initiates. When he pays interest, you only have to pay it through a monthly installment amount.

However, in today’s market, a hard money loan is about 10 percent higher than any traditional counterpart. However, for a fix and flip property, it is an amazing and beneficial tool to help build their real estate portfolio.  

Additionally, hard money loans can be more costly depending on the loan-to-value (LTV) ratio of the lender. For example, the lender finances 70% – 80% (or less) of the property’s value. The borrower is likely to bring a large down payment to the closing table. However,  If he doesn’t have the cash available to do this, he might not see a hard money lender who will work with him. 

Now let us discuss briefly on hard money loan example.

Hard Money Loan Example

To further explain how a hard money loan works, let’s take a look at this real-world example:

Helga wants to go into house flipping. However, she does not have the resources to purchase a property on her own. Also, she does not have the cash to use for down payment collateral. Although she has heard some hard money lenders offer 100 percent financing. 

She reaches out to many lending companies and discovers that these rates are only available to experienced flippers. 

However, Helga decides to lay low for a year while she gets her finances in order. She starts saving money for a down payment. Afterward, she discussed with her best friend, Tony, a contractor, they decide to join together. They pool their savings, $45,000, to put a 15 percent down payment on a $300,000 home. The home is old, but has good structures and is located in a promising neighborhood where sales are growing. 

Hard money lenders: Beginners’ Guide & Best Picks

Helga and Tony search for a loan and end up working with a hard money lender who lets them borrow $180,000 at an interest rate of 9 percent. Though, none of them has experience in real estate investing. However, Tony is a well-known contractor in the local area, and the lender respects his work. Helga has worked on her personal credit significantly, showing financial responsibility. 

The best friends put $15,000 into renovating the home. They are able to work fast since Tony can do most of the work himself. His work also makes the project more affordable. They end up paying their mortgage for 3 months before selling the home, which amounts to $48,600 (9 percent of $180,000 = $16,200 x 3 months). 

When all is said and done, They both sell the house for $400,000. In total, they invested $108,600 into the home (down payment, rehab work, and loan interest). This earns them a profit of $8,200, around 6 percent, which isn’t too bad for first-timers! 

Hard Money Loans Lender

Hard money lenders are usually private investors that deal particularly in this type of lending. Traditional banks can’t give you a hard money loan. However, hard money lenders aren’t subject to the same regulations that traditional loan lenders are. Hence, they are free to make their own rules about what credit scores or debt-to-income ratios they want their borrowers to have.

Indeed, you can find a hard money lender who will give you a loan even if you’ve been denied by traditional lenders. They are not concerned with the borrower’s creditworthiness, but the value of the property being purchased. 

Conclusion

In conclusion, you should remember that hard money loans are not given in local banks. Also, only private investors or companies give out such loans. Hence, they determine the interest and credit score of the borrower.

What are hard money loans FAQ

Is a hard money loan a good idea?

If you’re rich and you need money for an investment property quickly, hard money loans are a good choice. They don’t have all the red tape that comes with bank loans. You should pay attention to the fees and interest rates when you look at hard money lenders.

Why is it called a hard money loan?

Loans secured by real estate, also known as “hard money loans,” are a form of asset-based financing.

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