Hard money is a loan from a non-bank lender. 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.
Hard money lenders are similar to private lenders and in some cases the terms are used interchangeably.
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.
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.
Hard money lenders typically offer the following terms:
- Loan origination fee: 1% - 4% of the loan amount
- Interest: 8% - 12%
- Points: 1% - 3% of the loan amount
- 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.