About Hard Money Lending

Hard money lending is a type of mortgage financing designed specifically for real estate investors.

Hard money financing is issued by private investors or companies rather than traditional banks or lending institutions. It is typically short-term and designed to get you from point A (such as buying a distressed home) to point B (such as renovating and selling this property). In some cases, hard money lending allows you to tap the existing equity in your investment property for other business purposes.

First and foremost, a hard money loan is a mortgage loan. Like a traditional mortgage loan on your primary residence, it’s secured against your property. That means the lender could foreclose on the property in case of default – a process universally considered the worst-case scenario for both the lender and the borrower.

Another common feature between hard money financing and better-known types of mortgages is that title companies facilitate all closings. Both the hard money lender and the borrower wire their funds to the title company. The title company manages the distribution of funds, pays due taxes, and ensures that the property title has no defects. Once the hard money financing is secured, the borrowers pay the lender a pre-determined interest rate until that loan is paid off and the lien is removed from the title.

With that, the similarities between hard money lending and traditional financing end.

Hard money loans are typically used to buy and renovate distressed properties needing extensive renovation. Conventional lenders consider these types of properties super risky and avoid financing them. If not for hard money lending, those real estate opportunities could have been available only to investors with pockets deep enough to pay with cash.

Hard money lending is based on a drastically different approach to underwriting. Hard money lenders are not concerned with long-term loan sustainability. This is why they focus less on the borrower’s credit or income than traditional lenders. Instead, the transaction’s profitability is at the core of hard money underwriting. The more profitable it is, the less risk is involved, emboldening a private hard money lender to provide its borrower with more financial leverage. Profitability is determined by subtracting all expenses incurred during the transaction from the sales price of the newly renovated property.

That sales price of the newly renovated home is essential for another reason: in hard money lending, it’s used to determine the loan your lender is willing to offer you. Since the value increase is still in the hypothetical future when your hard money loan is issued, it’s determined by a special type of appraisal called the after-repair value appraisal. The appraiser arrives at that value by looking at the recently sold newly renovated properties in the neighborhood of similar style and size. Because the property’s after-repair value is higher than the purchase price, hard money lenders can lend a significant portion of the initial purchase price and rehab budget. In other words, it can help you leverage even modest savings to make money in real estate.

Hard money lending offers several potential benefits:

Quick access to capital: Hard money loans can be processed and approved much more quickly than traditional bank loans, which can be helpful for real estate investors needing to be fast and nimble.

Flexible terms: Direct private lenders lending their own funds offer significant flexibility regarding the loan’s structure and repayment terms. This can allow borrowers to customize the loan to their specific needs.

Limited borrower requirements: Hard money loans are primarily based on the value of the collateral rather than the borrower’s creditworthiness. Also, hard money lenders don’t verify income or even your immigration status.

Funding for properties banks don’t lend on: Hard money lenders are specifically designed to finance properties other financial institutions don’t want to touch with a ten-foot pole.

Lower cost of capital than a partner: Real estate investors use hard money lending to avoid splitting profits with partners. When it comes to real estate investing, the mantra is Control Thy Costs, and even a good partner costs a lot. Hard money lending supplies the capital you need at a fraction of your partner’s cost. You keep 100 percent of profits.