What is a Hard Money Loan and When Is It Used?

Home Home Buying What is a Hard Money Loan and When Is It Used?

Potential investors are finding hard money loans an attractive alternative to conventional mortgage loans. Here is an overview of hard money loans and when they are typically used. 

Hard money loans are becoming more popular in recent years particularly for those interested in investing in property with the intent to resell and make a profit.

Potential investors are finding hard money loans an attractive alternative to conventional mortgage loans. Here is an overview of hard money loans and when they are typically used.

What Is A Hard Money Loan?

Hard money loans are short-term loans typically used by real estate investors. Real estate investors often purchase properties at real estate auctions. One of the main requirements of real estate auctions is that the buyer must have the cash and be able to complete the transaction at the close of the auction or shortly thereafter. With a conventional mortgage loan, this could not happen because these loans can take weeks to complete.

Hard money loans are the ideal solution because they can be completed very quickly. In many cases, all the borrower has to do is fill out a loan application with a hard money lender. When a borrower applies for a conventional mortgage loan, there appears to be countless pages of paperwork that needs to be completed, and then most of it has to be verified. This can often take weeks.

There’s employment history, proof of income, credit history, debt-to-income ratios, appraisals, title insurance, settlement statements and more. The list just seems to never end. When you apply for a hard money loan for investment purposes, it’s not unusual to have you answer within the hour.

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A conventional mortgage lender is going to base the decision to approve or deny the loan on all the required information mentioned above. A hard money loan, on the other hand, is generally approved or denied based on the value of the property you wish to buy or the value of your equity. Hard money loans are generally used by the following.

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  • Buy-and-hold investors who purchase a home in need of repairs, fix it up and rent it out to others.
  • Fix-and-flip investors who purchase property in need of repairs, renovate it and sell it within a year.
  • Portfolio investors who are interested in owning property to increase the size of their rental property portfolio by owning a few properties.

Why are Hard Money Loans Gaining Popularity?

Here are a few of the many reasons why hard money loans are so popular.

  • Loans are approved and funded much quicker. The hard money loan application is very straightforward. It can be approved in as little as five to ten minutes. The money may be funded within a week possibly less.
  • Hard money loans carry more weight for real estate investors. If you’re hoping to purchase property and inform the company that you’re using a hard money loan, it will carry more weight because they’re easier and faster to obtain. If, on the other hand, you tell them you’re applying for a mortgage loan, they’re not going to be as assured of getting their money in a timely fashion.
  • Hard money loans offer room for negotiation. A motivated seller is going to be more willing to negotiate the price if he or she knows the transaction involves cash and a quick closing.
  • Credit and income history are not as important. Unlike conventional mortgage loans, which put a lot of emphasis on credit scores, employment and income, hard money loans focus more on the value of the property and the amount of the down payment. Often one blemish on a borrower’s credit report can hurt them for years. Because hard money loans are asset-based, credit issues are seldom a problem.
  • More deals available when investors use hard money loans. Investors often get better prices offered to them when the seller knows hard money loans are involved. They also have the opportunity to purchase additional properties.
  • Borrower can have multiple loans. Conventional banks often set a cap on the amount they will lend to a borrower, and this amount is generally based on their debt-to-income ratio. Because hard money loans are based on the borrower’s equity, they may be able to have several hard money loans at one time and may cross-collateralize their properties if necessary.
  • Hard money loans offer more flexibility. Hard money lenders offer more flexibility than conventional banks and lenders. The biggest reason is because hard money loans don’t have near as many rigid and strict regulations. If a problem does arise, it’s not unusual for a hard money lender to work with the borrower to resolve the issue to the satisfaction of both.

Hard money loans may not be the right financial option for everyone. Hard money loans, for all their good points, come with higher interest rates and may also include reimbursement fees. However, they are an ideal choice for would-be investors because they offer them the opportunity to invest in property and make a profit at the same time.

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About the author

Brian Meiggs
Brian Meiggs
Brian Meiggs is a personal finance expert, and the founder of My Millennial Guide, a personal finance site helping you put more money in your pocket. He helps millennials follow the smart money in order to increase their earning potential and start building wealth for the the future. He regularly writes about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. He has been quoted as a top personal finance blogger in major publications including Yahoo! Finance, NASDAQ, Discover, MSN Money and more.

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