What Hard Money Loans Are and How They Work

Are you an entrepreneur or a business owner? Do you want to get involved in buying and developing properties? If so, a hard money business loan could be the perfect solution for your needs.

A hard money loan is also known as a short-term bridge loan. These loans are ideal for entrepreneurs without demonstrated experience, borrowers without perfect credit, and other individuals who are interested in purchasing property for business purposes. This article will delve into what a hard money loan is all about, how the loans work, and other important factors that will help you make the right lending decision.

The Definition of a Hard Money Loan

A hard money loan is a loan backed by collateral that is secured using real estate assets. A borrower who has an adequate amount of collateral can quality for a hard money loan even if they have spent little time in business or have poor credit. As mentioned above, most hard money loans fall under the category of a bridge loan.

It might sound a little strange, but hard money lenders don’t have to count on you paying the loan back. This is precisely why the state of your credit isn’t going to matter as much as it would for most other loans. Instead, your loan is largely based on how much your collateral is valued. If you do not pay the loan, the lender will take over possession of whatever real estate was used to secure the loan.

Situations Where You May Want a Hard Money Loan

When you’re learning more about what a hard money loan is, you can think of it as a loan that is by investors and to investors. What do we mean by that? Someone choosing to take a hard money loan wants to take ownership of a piece of property quickly. In most cases, this person also wants to relieve themselves of ownership just as quickly or find other ways to monetize its existence.

The quintessential hard money borrower is someone who makes a living by flipping houses or businesses. They use the property they purchase as collateral for the loan. The person who takes out this loan doesn’t plan to keep the property long enough to end up underwater on their hard money loan.

The basic idea is to make repairs to the property to increase its value before selling it for more than it cost, to begin with. If that doesn’t work out, the buyer will search for a way to refinance before they end up paying more in interest than the property is worth or losing the property completely.

However, this isn’t the only situation where someone might want to utilize a hard money loan. It’s also common to seek out this form of lending to rent out a property to other individuals.

Advantages of a Hard Money Loan

Hard money loans come with all sorts of advantages for those who want to buy a property and then sell it or otherwise make money using it. A few of the most important advantages to be aware of include the following:

  • Quick Approval – Avoiding the long and frustrating process of being approved by a bank can save you a ton of time. The hard money loan lets you do exactly that. This can be a huge advantage if you are in a location with a competitive real estate market. Hard money loans let you get your offer in fast, which may be all you need to get the property you want.
  • Excellent Flexibility – If you’re someone who works with real estate investments, a hard money lender can be the perfect choice for loans. These lenders are often more sympathetic to flipping houses to make money than any of the local banks will be.
  • Negotiation Possibilities – There are only a certain number of ways that banks can negotiate if they choose to do so in the first place. A hard money lender often allows more negotiation so you can keep your options open. You may be able to get better terms when you choose a hard money loan.
  • Less Emphasis on Credit – Poor credit isn’t an immediate dealbreaker when applying for a hard money loan, while it might be with traditional loans. If you can show that you have equity, a good plan, and real estate experience, bad credit isn’t going to be the single thing that precludes you from being approved.

How a Hard Money Loan Works

A hard money loan will often resemble other types of short or medium-term, high-interest loans you see available. Most of these loans have a term of less than a year, although they can sometimes last up to five years. In most cases, the interest rates on this type of loan will fall between about nine and 21%. With a hard money loan, no underwriting process is used by all lenders. Because of that, the process can often vary to a large degree between two lenders.

Since all hard money loans are different, the terms of yours are going to differ based on the deal you worked out with your lender. The loan-to-value ratio and the region where you’re buying property will also play a part in things. When it comes to the ratio, the higher it is, the more risk your lender is taking on. This often means that your interest rate will be higher than it otherwise would be.

There also may be other costs in the form of closing costs of points. Points are a variety of different fees that may be associated with a hard money loan. In a general way, one point charged onto your hard money loan will translate to approximately 1% of the total amount of the loan.

Beyond that, this kind of loan is like many other traditional loans. It is going to create interest over time and you’ll typically make monthly payments until the loan is paid off. However many people pay off this sort of loan early to avoid the high rates that can add up over time. Since this is expected behavior, there typically are no penalties for paying ahead of schedule.

The Process to Qualify for a Hard Money Loan

The first thing to be aware of when trying to qualify for a hard money loan is how much money you can expect to be loaned. Keep in mind that the value of the property that is being used as collateral will play a large part in how much the loan can be for. However, other factors come into play that you should be aware of.

You’ll find that many hard money lenders focus on a specific kind of property such as commercial or residential. That’s why you need to do a bit of research to find a lender who works with the same kind of property that you plan to secure. Also, you may need to show that you have enough capital to invest in the property and that you have a plan in place for paying off the loan.

Hard money lenders will also look into whether you have experience with real estate transactions to gauge whether you qualify for a loan. While you will likely have your credit rating looked at as a part of the process, it typically will not play a part in the decision about whether you can have a loan from a specific lender or not.

Where to Get Hard Money Loans

Most hard money lenders are private investors or investment companies that are interested in the real estate world. Since real estate is tied to specific locations, most hard money lenders are going to operate on a local or regional basis. This can make it difficult to find since every location is a bit different.

Since you’re trading based on real estate, areas that have a hot real estate market are also likely to have many hard money lenders. On the other hand, if the real estate market in your area isn’t seeing a lot of action, hard money lenders may not be around. However, local real estate associations and brokers can often point you toward the hard money lenders in your neighborhood.

Taking a look online for resources about hard money lenders can help you find options in your location. This will get you the names and contact information for the largest lenders in your area. If you are searching for someone a bit smaller, the real estate community in your area might be the best way to find them.

Hard Money Loans in West Palm Beach, Florida

If you’re looking for an experienced hard money lender in West Palm Beach, HML Solutions offers hard money and bridge loans for commercial projects in the area. We tailor our loans to meet the needs of property investors for fix and flip projects or more unique arrangements. You can learn more and contact us for questions by visiting our website.