Hard money, or a hard money loan, is a specific type of financing which is secured by real estate. Firms that arrange hard money loans are known as hard money lenders. Another term for hard money loan is a bridge loan or bridge financing. Hard money loans are usually short-term loans utilized by real estate investors who intend to purchase, improve and then sell a property for a profit. The term of the hard money loan is often around 12 months but longer terms are possible. The loans are often interest only with a large payment that pays off the loan at the end of the term known as a balloon payment. In most cases, the borrower either refinances the loan or sells the property in order to raise funds to pay off the property.
Loan to Value Ratios for Hard Money Loans
The loan amount the borrower is able to borrow from the hard money lender is dictated by the ratio of loan divided by the value of property. This is known as the LTV (loan to value). Most hard money lenders will only lend up to 65-70% of the current value of the property. Some lenders will lend on the after repair value (ARV) which is the estimated value of the property once the real estate investor (borrower) has made their planned improvements. This is a riskier proposition for the hard money lender since something could go wrong with the renovation and the borrower has less of their own money invested in the property, which increases the likelihood that the borrower could default on the loan and walk away from the property.
Interest Rates for Hard Money Loans
Due to the higher risk involved on a hard money loan, the interest rates for a hard money loan will be higher than conventional loans. Interest rates for hard money loans are generally in the 10-15% range, depending on the hard money lender and the perceived riskiness associated with the loan.
Borrower Requirements for Hard Money Loans
Hard money lenders are primarily concerned with the loan to value ratio and less concerned with the borrower’s credit. Credit is considered but a recent blemish on the borrower’s record such as a foreclosure or short sale can be overlooked if the credit is otherwise in good standing and there is sufficient income to pay the interest.
Other criteria hard money lenders will consider includes the borrower’s plan for the property. The borrower must present a reasonable plan that explains what they will do with the borrowed money and how they will repay the loan once the term becomes due.
Types of Hard Money Loans
There are many different types of hard money loans but some of the most common include rehab loans (also known as fix and flip loans), constructions loans, land loans, purchase loans, and refinance loans among others.
Rehab loans are for real estate investors who need to purchase a property and quickly make improvements to the property so they can sell it for a profit. Fix and flip investors love rehab loanswith hard money since theycan get their loan funded quickly and typically only needs the loan for a short amount of time (3-9 months).
Land loans are utilized by real estate investors who wish to purchase and improve a property or simply raise capital through the loan in order to improve a property they already own. Due to the higher risk associated with land loans, the loan to value ratio requirement will be lower than other hard money loans, most likely around 50%. Interest rates will also be higher to compensate the hard money lender for taking on a loan with increased uncertainty.