Hard Money Loan

A hard money loan is a type of financing, as the name might suggest. However, it is a little different than the loans you may think of when talking about financing. Generally, the borrower in a hard money loan gets their money based on the value of a piece of commercial real estate.

In most cases, a hard money loan comes at a much higher interest rate than the more typical, traditional commercial loans do. In fact, it is often higher than any other loan including personal or residential loans that one can apply for. This makes them expensive for those taking them on and due consideration should be given to this fact before someone applies for a hard money loan. As well, hard money loans usually come from any place except a commercial bank. In fact, most deposit institutions want nothing to do with hard money loans. Instead, hard money loans come from individuals or other types of companies, in most cases, rather than from financial institutions.

Hard money loans first showed up in the 1950’s. This is when the credit industry first started to undergo significant changes. Hard money loans were a way for property owners who wanted capital and had no other way to get it to do so. Eventually the industry of hard money crashed during the real estate crashes of the 1980’s and 1990’s, only to recover again in recent years. Today, high interest rates are the mark of hard money loans as a way to protect the loans and lenders from the considerable risk that they undertake.

Hard money loans, as you may recall, often come with much higher interest rates than traditional loans. Why, then would anyone want a hard money loan in the first place? If you can get a bank loan in the traditional way for a lower rate, then there must be other advantages that accompany a hard money loan which make getting one appealing. Here are a couple of the reasons why a hard money loan may be a viable option for a borrower.

The most common reason to pursue a hard money loan is to get the money faster. With a bank loan, you are usually looking at 45 days, at minimum, to get your money. In the case of some loans, you may even be looking at 3 or 4 months. Private money, which is used in hard money loans, can usually be in the hands of the individual that applies for it in as little as 24 hours. This means you can start making use of it almost immediately. For individuals that find themselves in an emergency need of cash, clearly hard money loans are a viable option.

Another reason someone may pursue a hard money loan is the state of their property. If a property needs fixing up or does not produce cash flow, it is usually not eligible for a bank loan. On the other hand, if you are after a hard money loan, a private lender may be able to get you the money you need to fix up the property or get it to a state of making money. Thus, a hard money loan opens up new loan options for the consumer and a way for the consumer to get the funding they need to make renovations and repairs. It is a benefit to you and the lender, albeit at higher interest rate price tag. Essentially, you will need to decide if the hard money loan is what you really need and if it will truly benefit you in the long run.

Finally, if you are looking to buy commercial property that has no tenants, you will find that banks will have no part of it. A hard money loan can help act as a financing bridge. The hard money will buy you time to get tenants and have them in there for a year or more. Then, you can refinance at a lower rate with a bank and pay off the hard money loan in the process. In essence, a hard money loan allows for the borrower to establish stability—once stability is established the borrower may then be eligible for different loans with better interest rates. Again, you will need to make the final determination whether or not a hard money loan is right for you.

Though hard money loans can get you money in a hurry and in tough situations, there are some drawbacks. Considering the cons of a hard money loan may help you avoid a costly mistake. Once you know what to expect, you can avoid the problems associated with ill advised hard money loans. Here are a few cons that may open your eyes a little bit to the drawbacks of getting a hard money loan.

First of all, there is the cost associated with the hard money loan. In comparison to a traditional business loan, a hard money loan will be much more costly. You can expect to pay a fair amount more in interest rate in exchange for having the money faster. Consider the higher interest rate as the cost you pay for the convenience. Additionally, up front fees will add to the cost of the loan overall and it may do so considerably. This can end up making the loan financially debilitating in the long run.

Secondly, extensions are hard to get on hard money loans. If you get to the end of your interest term and need an extension, you may not get it. In that case, the entire balance of your loan will be due immediately. If you do not have the money, it gets even worse for you. Most hard money loans will foreclose on your property much faster than a commercial lender. Essentially, if you don’t pay you could be out of your property as fast as the law will allow. Thus, there are considerable risks when taking on a hard money loan.

As a final point, a hard money loan will likely have a prepayment penalty. In other words, paying off the loan early can often cost you as much as 3 months of interest. Even if you don’t think you will pay off early, it is nice to know you can. With a hard money loan, the option to pay off the loan early without considerable consequences is just not there in most cases. In the end, the drawbacks linked with a hard money loan must be fully considered long before you decide to take on the awesome responsibility of such a loan.

Knowing when to take out a hard money loan or knowing who should take out a hard money loan is important. Even though they are tempting, they are not for everyone and it is important that you always remember the additional risks that accompany hard money loans. In fact, there are only a select set of circumstances where a hard money loan is really appropriate. Make sure you are familiar with these circumstances to prevent yourself from making a bad financial move and from placing you and your property at risk.

A hard money loan, first of all, is ideal for those where time is a factor. If you need to have money available fast for making real estate purchases, hard money loans are good for just that. They can get you the money in 24 hours, whereas a bank loan can take months to process. Nevertheless, think long and hard about whether or not you really need the money in a hurry.

Secondly, a hard money loan is for those who are making purchases of property that needs improvement. The need for such improvement makes the land undesirable for a bank loan. Hard money loans, though, come from private lenders who may be willing to take a chance on a property you are improving. Also bear in mind that in the event you have difficulty paying off the hard money loan, you run the risk of losing both your money and the property.

Finally, real estate may be just lots. Not unlike land needing rehabilitation, lots are not desirable for banks. They don’t have a lot of value, and if handled wrong, lots can decrease in value. Hard money loans, though, are usually available to purchase a lot that may soon be upgraded through building.

Knowing when a hard money loan is appropriate is important. There are times it is tempting to get the money fast when you don’t necessarily need it. Understanding need and appropriate hard money lending situation is a good way to ensure that you make a sound decision about your hard money loan.

Once you decide on a hard money loan, you have really only conquered half the battle. Because the money comes from private lenders, it is sometimes difficult to know where to look for ahard money loan. Consider some of the more common ways to track down a hard money lender for your next real estate or business venture.

One place to look for a hard money loan source is with local attorneys. Find settlement and closing lawyers who have worked to prepare hard money lender loan documents. They can usually tell you who is loaning hard money and looking for places to invest it. They are a wealth of information, so get to know the local lawyers.

Secondly, you can talk with area accountants for a referral. They usually have clients with a lot of free capital that can be lent out to you in the way of a hard money loan. Even if they do not know a traditional hard money lender, they may be able to help you get connected with someone who is interested in getting into hard money lending. Talking to accountants can often help you find and create long lasting lending relationships.

As a final point, try looking for houses undergoing major renovation. Since these are often the houses that are most conducive to hard money loans, write down the addresses. You can then go to the local courthouse and find out who the lender is for the renovation from their permit pulls. If you look, you may be able to find some private lenders in the mix. Contact these lenders and see what the situation is for you getting a hard money loan from them.

Hard money loan minimums and maximums vary because of the nature of the loans. Since the money is coming from a private lender, it is largely up to the individual or individuals to decide what their minimums and maximums.

It is important, though, to realize that there are usually minimums on the hard money loans. So how do the lenders decide what the minimum is going to be? There are a few factors they consider.

For one, they consider the interest rate. For a higher rate, a smaller loan may be possible because of the money making versus risk ratio. Also, the investment itself may influence the minimum on the loan. If your reason for needing the money is sound, then you may be able to get a smaller loan, otherwise you may be stuck with finding another source. Finally, a minimum may simply be determined by what is worth the lenders time. If you need a smaller loan, you can probably get it, but you will have to spend time on your search.

As for a maximum, that also depends on several factors. One factor may be your relationship with the lender. The more you earn their trust, the more likely you are to get more money. Secondly, and most obviously, the resources of your lender are a factor; they cannot lend what they don’t have. As a final point, you may be looking at a maximum based on what you are using the money for; lenders like to feel good about what they are lending for.

So you know you want and need a hard money loan. You found a source or sources, you know what the money is for, and you have all of your proverbial ducks in a row. Have you thought about how much it will cost, though? You may recall that a hard money loan is more expensive than a traditional bank loan, but how much more? Take the time to get a little information on how much more a hard money loan can cost you.

For one, the interest rate on a hard money loan will almost certainly be higher than on a traditional loan. How much more? You can actually expect to pay between 10% APR and whatever the lawful maximum is. This is because you are using a private citizen’s money and they are assuming a lot of risk with you. Additionally, you will be getting the money faster than with a bank. Just remember, though, that your interest rate is going to be very high.

Another cost is the up front fees. There are not always fees on the front it, in fact that depends a lot on the lender. However, most will charge you a percentage of the overall loan when you take it out. That means that not only are you paying more during the loan, but also you will be paying more on the front end of the loan. Your costs are going to be considerably higher.

One real problem borrowers run into with hard money loans is that the penalties involved in them can be costly. What are penalties? It depends on the loan, but in most cases they are amounts or punishments assessed for late payment of the loan or in some cases early payment of the loan.

One of the real problems with hard money loans is how quickly they can act when things go wrong. If you hit the end of your loan and are unable to pay it off, you can ask for an extension on the loan. However, that extension may not be granted. Instead, a foreclosure may happen where your lender takes over your property or whatever you put up against the loan. Foreclosure with a bank can take weeks or months and involved negotiation and attempts to help you keep your property. With a hard money loan, a foreclosure will often happen as quickly as the law will allow. It is a harsh and fast penalty.

Another hard money loan penalty that you can encounter is early payment. At the very least, most hard money lenders have a 3 month minimum interest allotment. That means that if you repay inside of three months, you still owe the interest for three months. If you do so after, you are free and clear of the loan. Be aware of prepayment, especially if it extends beyond the standard three months.

Prepayment and default penalties can kill you with a hard money loan. Since it is private money, action is taken by one person and thus is faster. Also, because the loans are more expensive, you can end up with real problems without the resources to get out of them.

So how long is the term of a hard money loan? This is a frequent question when it comes to hard money lending. With any loan, length of the loan is highly influential. It affects payment size, interest rates, and how long you will be tied down by the loan. So consider some of the facts about hard money loan terms and lengths.

As a general rule, hard money loans are short to intermediate in length. Since they are used for everything from cars to motels, though, the term length is obviously varied depending on the lender and the loan. However, most hard money loans will wind up somewhere between one and six years. Usually, the payments include some interest and principal, but in the end there will likely be some sort of balloon payment owed. That is where borrowers often run into trouble.

There are, though, longer hard money loans. IN some cases, actually, a hard money loan can be like a mortgage. That means you can be paying for 30 years. In these cases, though, there are definitely going to be balloon payments and a close eye kept on the loan.