The term “hard money loan” refers to a type of loan that is backed by a “hard” asset and is commonly used in the real estate industry. Also knows as a Bridge Loan, these are “asset-based” loans usually secured by real property. Hard money loans are most frequently used for short-term financing.
You won’t find a hard money loan available at your traditional institutional bank. They are traditionally provided by individuals or companies that specialize in providing this type of financing. Unlike a conventional institutional loan, this type can be very attractive in certain circumstances because they:
- Can be funded much quicker (in some cases days instead of weeks or months)
- Are asset-backed, instead of credit-based or DTI-based
- Have far less strict underwriting criteria
- Do not usually require an appraisal
- Do not require the asset / property to meet specific criteria
Conversely, a conventional loan often has a lengthy and complicated approval processes and weighs heavy on the borrower’s credit worthiness and/or DTI (Debt : Income Ratios).
That said, these loans are not for everyone. You’ll be paying a premium for this type of loan. A hard money loan usually comes with:
- Higher interest rate
- Higher fees
- Shorter term (as short as 90-days in some cases)
- A lower LTV (Loan : Value Ratio – anywhere from 60-80% LTV max.)
- Often not available for owner-occupied, single family residences
Hard money lenders usually charge fees in the form of “Points”. Hard money lenders often charge 2-4 pts in fees (2%-4% of the loan amount). If a hard money lender charges 2 pts. (2 percentage points) for his fee and you are borrowing $500k, you’ll be paying him $10k in fees ($500k x 2.0% = $10k).
And the rate you’ll be charged will be much higher that a conventional loan as well. You’ll often see rates between 10% – 15%. Often this does not deter those who use hard money loans because they know they will be exiting the loan as quick as possible and limit their exposure to any accrued interest at that higher rate. So if you borrow $500k in hard money at 12% and have it for 90-days, you’ll be paying $15k in interest on top of the pts. discussed above. ($500k x 12% per annum = $5k/mo. x 3 months = $15k).
Hard money loans can be an excellent way to secure a real estate investment and an excellent tool to help you compose a much more attractive offer.