Hard Money Loans: What's it all about?

Have you ever pondered when you should choose to borrow from hard money lenders for investing in real estate. Here's a layman's guide to borrowing through hard money loans. To start with, we will make you aware of the downsides of hard money. Later, we will introduce you to the upsides of hard money. So, keep reading……

A hard money loan will often be one of the last resorts for funding your real estate deals because you are dealing with experienced investors who are looking for good returns on their money. That means it is generally amongst the most expensive money you can borrow.

Hard money lenders are 3rd party lenders who charge interest rates higher than the current market rates. The interest rates charged by hard money lenders are typically 5-10 percentage points higher than the conventional lenders. Hard money lenders will also charge "points" on a loan which is essentially pre-paid interest on loan. All this makes, borrowing from hard money lenders an expensive alternative.

So, on the plus side, hard money loans are generally worth approximately 65-70% of the after repair value (ARV) of the property in question. This is beneficial because it allows you to obtain the necessary cash to finance renovation costs as well as the purchase price. This means you can potentially get into a deal with little to no money down if the after repair value to cost ratio is high enough.

Hard money lenders will lend based on loan security and not on the applicants character or trustworthiness nor do they lend based on their credit score. Hard money loans may not have the best rates but they are flexible and can be an alternative option for applicants with low credit, or those who don't want to waste time waiting for approval from banks and credit unions.

Hard money lenders could be found in the "money to lend" section of your local newspaper most often. Next would be at a gathering of your local housing investing association. Local hard money lenders will attend every now and then to solicit new business. Also, you can find them on the net by searching for keywords like "hard money lender" or "hand money loans".

There are several things to know when considering hard money lenders for your real estate transactions. First are some cons to hard money loans, the largest of which is that hard money will be leant to you at a much higher rate than prevalent from other lenders, typically 5-10% higher. They may also charge 'points' on the loan to ensure that they make a good return on it. There are pros to hard money lending as well, typically these types of loan are much easier to obtain and rely less on creditworthiness and more on the security of the loan, so hard money is much more flexible.

Further Resources

Real Estate Radio USA have a directory of hard money lenders available on their blog.

And there's a little more detail about hard money loans available in this article over at BiggerPockets.com

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