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What is Hard Money in real estate?

What is hard money loan?

In the context of lending, hard money refers to a type of a loan that is typically issued by a private investors or lending companies, rather than traditional banks or credit unions. Hard money loans are exclusively used to finance real estate investments and use real estate as prime form of collateral. Examples of these loans include fix and flip loans, debt service coverage ratio DSCR loans and some forms of ground up construction loans.

Unlike traditional bank loans, which are typically based on the borrower's W-2 income, hard money loans are primarily based on the value of the underlying property and its ability to generate rent revenue. Hard money lenders may provide loans for up to 70-80% of the property's value, depending on the lender and the specific circumstances in respect to DSCR loans and sometimes up to 100% of loan to cost (LTC) for fix and flip loans, where lender provides all the money and borrower doesn't have to bring any cash to the closing.

Hard money loans are generally short-term loans, ranging from several months to a few years, and may have higher interest rates and fees than traditional bank loans. This is because hard money lenders are taking on a higher level of risk by lending to borrowers who may not qualify for traditional financing, and the loans are often used for high-risk investments. Just like with any financial instrument, hard money loans can be used for sophisticated leverage that propels your real estate career or a double edged sword that slices you up to bits if used incorrectly.

Hard money is a loan from a non-bank lender backed by a hard asset, in this context, real estate. Hard money loans are typically offered to experienced real estate investors on a short-term basis at high interest rates to fund fix and flip and rental property rehab projects.

What is a hard money lender?

A hard money lender is a type of private lender who provides short-term loans typically used for real estate investment purposes. Unlike traditional lenders such as banks, hard money lenders focus on the collateral value of the property rather than the borrower's W-2 income. It is important to note that hard money lending is a complex and nuanced field, and investors should carefully consider the terms and conditions of any loan they are considering before proceeding.

Hard money lenders are similar to private lenders and in some cases the terms are used interchangeably.

The loans provided by hard money lenders generally have higher interest rates and fees compared to traditional loans, and they may require a higher down payment from the borrower. However, the approval process is typically faster and less stringent, making hard money loans a popular option for real estate investors who need quick access to funds.

Hard money is often considered the second most appealing form of financing behind cash, because hard money lenders can typically fund a purchase quickly, even if the property is in poor condition. This is especially true if the hard money lender has experience working with the borrower (buyer) or if the borrower has a track record and other assets to pledge as collateral. This said, hard money lenders usually require an appraisal and a thorough review of the deal from a financial and legal perspective which can cause closing delays and result in the financing falling through.

Hard money lenders are different from banks in the following ways:

  • Collateral Hard money lenders are primarily interested in the value of the property being used as collateral for the loan. Banks, on the other hand, typically focus on the borrower's W-2 income, creditworthiness and financial history.
  • Speed Hard money lenders can often provide funding much faster than banks, which may take weeks or even months to process a loan application.
  • Terms and fees Hard money loans generally have higher interest rates and fees compared to traditional bank loans. They may also require a higher down payment from the borrower.

When talking to a hard money lender, it is important to ask several key questions to ensure that you fully understand the terms and conditions of the loan. Here are a few things to consider:

  1. What is the interest rate and how is it calculated? Hard money lenders may charge a higher interest rate compared to traditional bank loans, so it is important to understand how much you will be paying in interest over the life of the loan.
  2. What fees will be charged? In addition to interest, hard money lenders may charge fees such as origination fees, processing fees, and prepayment penalties. Make sure you understand all of the fees associated with the loan.
  3. What is the loan-to-value ratio? Hard money lenders typically lend up to 70-80% of the property's value for DSCR and 90-100% for fix and flip, so make sure you understand how much you will need to put down as a down payment.
  4. What is the repayment period and what are the terms of repayment? Hard money loans are typically short-term loans, so make sure you understand the repayment period and whether there are any balloon payments or other terms that may affect your ability to repay the loan.
  5. What happens if you default on the loan? It is important to understand the consequences of defaulting on the loan, including any penalties or fees that may be charged.

Not all hard money lenders are equal and before you move forward with a hard money lender, you should shop around to make sure you receive the most competitive terms and you fully understand capabilities and risks. We also recommend requesting 2-3 references (borrowers and title companies) to collect feedback and experiences of other professionals who have dealt with a given hard money lender.

How to get a hard money loan?

The easiest way to start is to get an instant quote from OfferMarket. Our quoting system is completely online and won't ask you for your phone number or email to show you our rates. Never again spend time on hold with another loan officer just to get asked twenty questions just to show you a quote when you can do it completely on your own schedule on as many properties as you need! You can even generate a pre-approval for your quote with just a few clicks. Our quotes provide highest level of transparency and our Loan Files list all our fees up front in a section called "Preliminary Loan Terms". That sectiinition is preliminary because our initial quote is based on the self reported information you provide during the initial quote. In later steps we collect documents from you to substantiate initial information and refine it if necessary for the "Final quote" that comes after we receive back appraisal report that we will order for you as part of our service. Click on the buttons above and below to start your quote now.

How much do hard money lenders charge?

It depends on hard money lenders operating costs, size and structure. At OfferMarket we run a lean, online first operation that allows us to keep our operating costs down, resulting in no interest rate spread being charged on any of our loans, a common practice employed by other lenders to increase their margin at the expense of their clients. While we can't speak for all the lenders that exist out there, here are all of our fees so you can use them for comparison if necessary.

Service provided Fee
Origination 1%
Legal document prep $995
Title Local market rate ($350-900)
Appraisal Local market rate ($250-550)
Appraisal Risk Review $95
Underwriting $495
Draw servicing (if fix and flip) $295
Draw inspection (if fix and flip) $250

Do hard money lenders check credit?

Yes, hard money lenders typically check the credit score of the borrower as part of their underwriting process. While credit scores are not a perfect indicator of creditworthiness, lenders still use them extensively to weight on credit decisions because credit scoring system is a wide spread standard that is used through out the capital lending ecosystem. Even if in some circumstances it doesn't capture full picture when it comes to creditworthiness of the borrower, in the vast majority of cases its serves its purpose to quantify the likelihood of the lender being repaid what is owed.

In addition to credit scores, hard money lenders may also consider other factors such as the borrower's income, assets, and the value of the property being used as collateral. However, because hard money loans are typically short-term and secured by real estate, lenders may place more emphasis on the value of the collateral than on the borrower's W-2 income, which is the biggest advantage of this loan product. My professional real estate investors don't have W-2 income because they are self-employed so this loan product is perfect for their meeting their needs.

While a poor credit score may not necessarily disqualify a borrower from obtaining a hard money loan, it may result in higher interest rates or more stringent loan terms. Borrowers with lower credit scores may also need to provide more documentation or evidence of their ability to repay the loan. Overall, while credit scores are not the only factor considered by hard money lenders, they can be an important tool in evaluating the creditworthiness of the borrower and assessing the risk of the loan. To find out if you qualify for our hard money loans, get a quote and the system will tell you if you qualify based on your self-reported credit score.

Do hard money lenders require down payment?

In vast majority of cases yes (99%). Most DSCR loans used for rental investing and refinance are priced at maximum of 70-80% loan to value (LTV) meaning the real estate investor will need between 20-30% of property value as a downpayment. For fix and flip loans, most common loan to cost LTC is 90%, meaning the real estate investors will need to bring 10% of deal value as downpayment. We have a program where a fix and flip investor with 30+ flips in the last 10 years (proven through deeds or property records) can get 100% loan to cost (LTC) on their fix and flip loans.

How to find hard money lenders?

Best way to find hard money lenders is online or through a recommendation from someone who has closed a loan with their hard money lender. When searching online use terms such as "hard money lender" or "private money lender" or specific loan types you are looking for in order to shrink your results and potentially find more specialized companies. When you get a recommendation from someone for a hard money lender, make sure to ask them if they have closed a loan with that lender as well as how their experience went to get the full picture about their process.

What is the difference between soft money and hard money?

When it comes to real estate lending, soft money and hard money have different meanings than in the context of political campaigns.

In real estate lending, soft money typically refers to loans that are in between hard money loans and traditional bank loans. Soft money required more extensive underwriting then hard money loans and are more focused on the quality of the borrower versus hard money loan that is more focused on the quality of the deal. Recent trends in private money lending are starting to blur the lines between these two credit products where more of the hard money space is starting to require more extensive borrower background verification due to the increase in interest rates and overall market conditions that are causing restriction of capital and deterioration of investment climate. Going forward expect to submit many documents and verifications to secure funding for projects that used to require much less, due to the tougher investment requirements placed on capital providers.

Hard money lenders typically offer the following terms:

  • Loan origination fee ("points"): 1% - 4% of the loan amount
  • Interest rate: 8% - 12%
  • Loan to value (LTV): up to 90% of of the purchase price plus the rehab budget

Hard money is an expensive form of financing and should only be used by experienced real estate investors on a short term basis. Hard money is used to fund a purchases and renovations and the borrower will then refinance into a conventional loan at a lower interest rate or sell the property for a profit and pay off the hard money loan.

Looking for a hard money lender? Get an online quote from OfferMarket

Take your real estate investing to the next level with OfferMarket. Access the most competitive and transparent rates on bridge loans (fix and flip) and 30 year fixed rate rental loans (purchase, refinance, blanket portfolio).