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Mar 23

What Is Hard Money Lending And How It Works

Reading Time: 4 mins

Before you ask about hard money lending or hard money loans you must first be aware of how the fundamentals of asset-based loan financing work. Asset-based lending is a kind of funding secured by individuals with the help of an asset. In simpler words, the asset works as security, or collateral, for the lender who has the right to sell it off in case the borrower fails to pay back the loan. The hard money loans work on the same principles.


What Is Hard Money Lending?

Hard money lending is a specific kind of short-term asset-based loan obtained from individuals and private investors through the mortgage of an asset. Since traditional lenders such as a bank would not provide hard money mortgages, hard money works like alternative financing to them. The hard money loan is generally the path of real estate investors who require funds urgently to secure the deal that they may be getting involved in. For instance, hard money lending may be used for projects that last only for a few months or a few years. In a nutshell, some of the features of a hard money loan may include:

  • A high amount of risk involved due to the nature and unpredictability of projects
  • Short-term loans that may last a few years
  • Greater interest rates
  • Credit unions or banks do not provide the hard money loans
  • Faster securement process due to lack of red-tapism


Hard Money Lenders

Hard money lenders offer to fund a variety of properties such as construction loans, rehab projects, machinery loans, land loans, and manufacturing facility projects, etc. However, they have been more popular for real estate projects where funding requirements are urgent and the repayment period is short. If you are looking for hard money lenders, you may look for the top-ranking hard money lenders in your region. For example, those in the Houston area could search for Houston Hard Money Lender to find local companies to consider. You can simply check your region’s loan securement requirement and contact the lender for more details.


What Is The Difference Between Hard Money Loans & a Bridge Loan?

The hard money loan is quite similar to a bridge loan in multiple ways. Both hard money and bridge schemes present similar criteria to the borrowers in terms of lending and costs. However, the two terms cannot be equated. The major difference between the two exists in the purpose of the loans. A bridge loan is typically issued for an immature commercial or investment property that may be in the process of transition and cannot yet seek traditional funding. On the other hand, the hard money loan is broader in context as they can be offered for both asset-based loans and distressed financial venues where bankruptcy or foreclosure proceedings may already be in motion such as mortgage arrears.


What More Should you Know About Hard Money Lending

If you are somebody who is looking for a hard money loan, you should know more than just the basics – many of the aspects of hard money loans are clearer at a deeper level of understanding. Therefore, it’s important to check out more details about hard money lending and here are some:

  • There is not only the basic interest rate, but there is also an additional charge that is called point rate which is 1% of the principal amount. While with traditional loans the points lie in the range of 1-3, when it comes to hard money loans, the points surge around 3-6 points which will add to the repayment amount.
  • As you are contacting the potential lenders, you must already be prepared with information regarding the projects. This may include details regarding your property location, recent appraisal and inspection data, the purchasing price, the planned resale price, and the estimated remodeling expenses. Besides that, your credit rating, the value of asset possessed, experience in the market, and flow of income will also help you in getting a good loan.
  • In case of default, the lender carries the right to foreclose. This option is typically chosen by lenders who do not believe borrowers or are willing to take advantage of the situation. It is due to this that borrowers who are borrowing for risky ventures choose to go with lenders they already have dealt with.
  • Another advantage that lenders have in the case of hard money lending is that they can ask for a first-lien position which means that if the borrower defaults, the lender will be the first one to receive repayment. Additionally, they can also take the second position for repayment.
  • The value in the LTV of hard money lending is different from the market value that is set by banks. The value in the case of hard money loans is a bit lower than the conventional value. It majorly depends on the expectation that lenders hold from the selling of the property.
  • As far as a hard money loan is concerned, the main collateral is the property being purchased itself besides assets, equity, and credit rating also being in the equation. This is the major reason for excessive riskiness for lenders in these loans which is also why the interest rates are high.

While it is generally not thought so, hard money is a potential lending solution for some mini and big projects. Since hard money loans are for a short period of time, it may be preferred over conventional mortgages that ask for a great amount of paperwork and red-tapism.

The question that you may like to ask first is: Can I pay the amount back in time? And will I be able to bear the high-interest rates on my hard money loan? If you have answers to those questions, you probably know if hard money lending is right for you or not. As in other funding cases, there are certain advantages and disadvantages that must be fully considered.


*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money or applying for a product. 


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