The "Need to Knows" About Hard Money Lending

The word “hard” in hard money lending may seem off-putting, but don’t let the term scare you off from considering it a viable option when looking to scoop up property.

Often used for real estate transactions, a hard money loan comes from a private lender instead of a bank and provides real estate investors with the financing needed to quickly purchase property. Unlike the requisites that come with applying for traditional bank loans, private lenders make decisions based on an investor’s experience, collateral, and borrower’s performance rather than their credit and income.  

Why should I consider securing a hard money loan?

We’re glad you asked! While hard money loans can be a more expensive option with slightly higher interest rates in place—anywhere from nearly 8% to 10%—there are many beneficial reasons for opting to take on a hard money loan vs. a traditional loan through a bank.

While traditional loans can take a month or more to be approved—if you’re approved at all—hard money lenders can get you funds within a week or two. Because the loan is heavily dependent on the collateral and borrower’s experience, lenders are less concerned about going through a traditional loan application making for a quicker, more seamless process without the burdens of red tape. These loans are typically shorter-term—lasting anywhere from one to five years—and make them ideal for investors who are looking to fix and flip property. Since flipping often happens on a short timeline—within a year or so—the loan can be quickly paid back.

There’s also a high propensity for hard money lenders to be flexible in the terms of an agreement as they tend to evaluate each deal individually and make decisions based on your specific situation rather than a one-size-fits-all approach driven by policies.

If hard money lending is ideal for investors looking to flip houses, that means they’re not often thought of as safe options for primary residences or a second home. Many private lenders prefer to finance investment properties, since the likelihood of the loan being paid off quickly is far more secure.

I’m ready to buy and flip a property. How can I secure a hard money loan?

A reputable, quality lender is key to taking the first step in this financial venture. Not all lenders are created equal and you’ll want to seek out lending firms that offer quick turnarounds, reasonable rates, and terms that allow you to invest profitably. Reach out to local mortgage brokers, mortgage banks, or even real estate agents for reputable contacts. Ideally, your relationship with a hard money lender should be a symbiotic one based on mutual goals and gains because of the investment.

As important as finding the right lender is investing in the right property. The investment project will greatly inform a lender’s decision on whether to provide you with funds, since they, too, expect to make their money back. A property that can make you the most significant profit is the surest way to pay the loan back as quickly as possible.

So, you have the right property in mind and have contacted the right lender. To seal the deal, you’ll need the proper documentation. While hard money lenders don’t typically go through the motions of a traditional lender, they still need proof of your credibility and information on the property in question. Once it’s been shown that you can satisfy the lender’s requirements, a verbal approval is followed by the request to fill out the loan.

Ultimately, understanding what hard money lending is, finding a reputable lender, and understanding the terms of the agreement are paramount to experiencing as seamless a process as possible. You, as an investor, hold power and can make decisions about what suits your financial needs. The goal is to find a lender that shares your goals and can help you reach them.

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