If you’re looking to buy a new home, you might have considered getting a loan from a hard money lender. However, not all lenders are alike! Here’s how to tell the good ones from the bad ones and what to expect if you end up working with one of the latter.
What Is a Hard Money Loan?
In business terminology, hard money is a cash loan (as opposed to a credit line or invoice financing) that doesn’t require a personal guarantee. In other words, it’s essentially a short-term loan with no co-signer required—the perfect solution for small businesses needing quick access to capital without waiting several weeks (or longer) for approval.
Common uses for hard money loans
Fixer-upper homes and commercial real estate. Commercial loans are increasingly hard to get; not every lender is willing to bet on speculative office or retail space. If you need financing for a project but don’t have 20% to put down in earnest money, a hard money loan can help. Also known as private money lenders, hard money lenders are willing to risk lower-credit borrowers because they usually finance less traditional properties with more complicated ownership structures.
How much can you borrow with a hard money loan?
First of all, not all hard money lenders are created equal. While some might provide a cash loan with as little as 5% down on investment property, others may ask for up to 50%. Most hard money lenders fall somewhere in between. Some will also lend to primary residences (whereas traditional banks won’t). And there are other hidden costs to look out for, too — like loan origination fees and interest-only payments if you can’t pay back your entire balance immediately.
What are the requirements to obtain a hard money loan?
Hard money loans come with a set of requirements that you will need to meet to qualify. Make sure you have a good credit score. Depending on which lender you’re working with, this can go anywhere from 500 to 800. You should also be able to prove how dependable your income is. If you can do that—and if your business is currently profitable or has been making steady profits over time—you may be able to secure financing from a hard money lender. Keep in mind that these lenders are looking for short-term deals, so they might not approve your loan if you seek long-term financing.
What does it mean when someone says they are a hard money lender?: Many people use hard money as an umbrella term for any lending that isn’t regulated by federal law. That includes private investors who lend out their capital (which they know best) and larger institutions like banks and credit unions.
Why go through a private lender versus traditional banks?
Think about it like this. Why did you decide to start your own business instead of working for someone else? Even if you had a great job with an income and benefits (that may be more than what most hard money lenders offer), things still attract you to becoming your boss. If we’re being honest with ourselves, starting our own business has some pretty big perks – not only in terms of getting our financial freedom back but also so we can be in control of our destinies. Being self-employed gives us a lot of opportunities that people who work for others don’t have. We can choose where we want to live, how much time we want to spend at work each day, and when we want to take a vacation or sick days. So why should it be any different when it comes to borrowing money? Borrowing from banks is almost always going to come with certain conditions attached. They will tell you how much they will lend you based on their criteria – which could include collateral requirements, debt-to-income ratios, credit scores, and more – then they will set up payment plans based on those numbers. But let’s say your business starts overgrowing before you even have time to make all those payments? It happens all the time!
What are the costs of using hard money lenders instead of traditional banks?
Hard money lenders aren’t banks—they’re financiers. Their goal is to make money off of you by giving you access to that hard cash. As such, they are incentivized to charge you as much as possible in interest and fees. For example, if a traditional bank loans you $100,000 at 4% over 30 years, your monthly payment would be $636. With a hard money lender at 10%, your monthly payment would be $1,050 (not including any other costs). And that doesn’t even include points (i.e., prepaid interest), which can run as high as 5% of your loan amount. So think long and hard about whether you want to pay more for something than it’s worth just because it gives you immediate access to capital.
Differentiate between an online hard money lender vs. an offline private lender
When looking to borrow money from a private lender, you want to get a loan from an online hard money lender. You don’t have time to wait around all day at a bank or real estate office while they try and find other investors in your deal. As soon as you know you need capital fast, you need an online hard money lender. Online lenders are very similar to traditional banks with one big difference – they lend based on property value rather than income or credit score. If you have a suitable property that can be used as collateral for a loan, you can use an online hard money lender. However, if your only option is going through a traditional bank or credit union, then do that instead of going through an offline private lender. It will save you time and hassle down the road!