In contrast to traditional loans which are funded by banks, hard money loans are short-term loans funded by a private investor or a group of investors, and which are secured by real estate. Terms for hard money loans are typically in the range of 12 months, although periods between two and five years are not uncommon. The monthly payment schedule is also different from that of a traditional loan in that it consists of either interest alone, or interest plus a specific portion of the principal, with a balloon payment required at the very end of the term.
Typical hard money loan deals
Almost any kind of property can be used for hard loans, including land, residential properties and commercial properties, although some hard money lenders prefer to specialize in one area because they have more experience with it. Hard money lenders almost always require that they be in first position, so as to limit their exposure in the event of default.
Even though many different property types are appropriate for hard money loans, that doesn’t mean these loans are appropriate for every kind of deal. The situations where hard money loans are most advantageous are for fixes and flips, land loans, construction loans, situations calling for fast action from real estate investors, and scenarios where a buyer has problems with credit.
In general, the biggest concern of a hard money lender centers around the equity in a property which can be used as collateral. This is great news for borrowers, since it shifts the focus off their own credit rating and onto equity in the property. As long as the client has the funds to pay for the monthly interest, they can still be considered a good candidate for a hard money loan. A hard money lender would also be interested in what a potential borrower has planned for the property since that will be tied to the borrower’s potential for generating income, ultimately to be used for paying off the loan.
Finding the right hard money lender
Although an Internet search will provide you with results you can work with, it would be better to conduct your search for a lender by attending real estate investment meetings, where hard money lenders are regular attendees. Another good source might be your network of real estate brokers and professionals, as well as conventional mortgage brokers.