What is a hard money lender? The term real estate can conjure visions of crooked-nosed guys cutting off a borrower’s little finger for collapsing on a hard money loan. But you can rest assured that, despite the nickname “hard money”, these professionals are not thugs. In fact, these lenders have a legitimate niche in the housing market for quick, asset-based home loans. And they lend money for massive real estate investments and ordinary houses.

What is a hard money lender?

There are many types of money lenders. To understand “what is a hard money lender“, it is important to know what a hard money lender is to lend that is: it is simply a short-term loan secured by real estate.

Let us come back to the question of who and what is a strong money lender: “It is synonymous with private investor”, declares Don hensel, president of North Coast Financial, which specializes in hard money loans. “A lender can be an individual, a group of investors, or a licensed mortgage broker who uses their own funds. It differs from a bank that uses the money of its depositors.

Benefits of a hard money loan

Why would a potential borrower opt for a hard money loan from a hard money lender instead of getting a mortgage through a traditional loan from a bank? Because hard money loans are usually less complicated than traditional lenders, especially when it comes to real estate investments. The other side of the coin? The hard money loan rates are much higher and you only borrow the money for a short period of time.

Hard money loans are especially popular for the following people:

Fins: If a shabby house hits the market and it looks like it can be fixed and overturned in several months, most borrowers would rather not have to take out a 15-year loan on the property. Instead, they take out a fixed, reversible loan, that is, a hard money loan, to purchase and renovate the investment property with the aim of repaying the lender for the loan of money in. within one year.
Builders: Many entrepreneurs use hard money to buy land, build on it, then sell the new property and pay off the loan quickly.
Real estate investors: Occasionally, a real estate investor will come across a killer case on a property that must be snapped up. If the real estate investor does not have the cash on hand to get hold of the asset, a short term loan can be accelerated by a tough lender, who is, in effect, a real estate investor as well.
People with credit problems: Borrowers who have cash on hand for a down payment for what will likely be an owner-occupied home but have been turned down by a bank for a conventional loan – or have had a foreclosure, default, credit rating low or other red flag on their recent credit report but have cash on hand – can use hard cash to purchase property that would not be available to them otherwise.

So let’s say you lost your job several years ago and your house was foreclosed on. Since then you have found a great job and are happy to be employed. You’ve also found a great deal on the perfect real estate, but there’s a catch: few banks will give you a mortgage with a foreclosure on your file.

There is a good chance that you can find a lender who works with hard money and who will give you the opportunity to buy that real estate before it escapes. You can then refinance with a traditional mortgage once the time has passed and your credit score improves.

“Higher interest rates might seem scary at first, but the benefits of getting a loan funded quickly and being able to get funding when all the banks have said ‘no’ will far outweigh. about the extra cost, ”says Hensel.

The closest thing banks to a hard money loan is a bridging loan, but qualifying for a loan can be more difficult.

How borrowers get a hard money loan

To find hard money loan options and explore hard money loan rates, ask your Realtor® for suggestions. You can also check Biggerpockets.comDirectory of Hard Money Lenders Across the United States But first you need to know how they operate.

Loan terms for hard money are usually much shorter; six months to a year is most common, but sometimes they can be up to five years. And, as you might expect, interest rates are considerably higher, typically ranging from 12% to 21%. Most hard money lenders also charge points upfront in addition to high interest rates, where 1 point equals 1% of the loan. 3 to 6 points is typical for a hard money loan.

So if you borrow $ 100,000 from a hard money lender, you would pay $ 1,000 per point charged, which would probably be an additional $ 3,000 to $ 6,000 up front, on top of the charges. interest that you will pay until the end of the loan.

The real estate down payment requirements for hard money loans are also different. You can expect to receive around 60-75% of the value of the property you intend to buy. If you are considering a $ 200,000 property, for example, the maximum that you will likely be allowed to borrow would be $ 150,000, which means that you will have to pay $ 50,000 up front.

On the other hand, since you don’t complete all the paperwork and extensive qualification procedures required by the big banks, you can usually get a hard money loan much faster. In many cases, it can take as little as a week.

Risks of a hard money loan

Once you can answer “what is a hard money lender,” you might be tempted to contact one. But you need to be cautious if you decide to go the hard money route. Be sure to take the time to examine the reputation of the hard money lender and have an experienced real estate lawyer review the documents. While there are many legitimate hard money lenders offering loans, there are also some predatory ones who try to take advantage of borrowers.