A hard money lender is an investor who makes loans secured by real estate, typically charging higher rates than banks but also making loans that banks would not make, funding more quickly than banks and/or requiring less documentation than banks.
What is a hard money lender?
What differentiates hard money lenders from bank lenders?
Why do hard money lenders exist?
When does it make sense for a developer to use a hard money loan?In our experience, even investors/developers with strong financial statements and access to bank credit frequently choose to use private money loans (also called “hard money loans”). Situations where private money loans make the most sense include those where the borrower:
The common theme is that there is an opportunity for the borrower to generate substantial profit (or savings) quickly, and the cost of interest and origination fees is small relative to the anticipated profit, even given the higher interest rates charged by private lenders versus banks.
What are other terms for hard money loans? Hard money loans are also sometimes referred to by the following terms:
(1) private money loans
(2) bridge loans
(3) short-term loans
(4) transitional loans
(5) asset-based loans
What are advantages of hard money lenders? Hard money loans can have a number of advantages over traditional bank financing including:
* A simpler application process and quicker approval/disapproval decision;
* Less scrutiny of the borrower’s personal financial situation, including income and historical tax returns, compared to bank loans;
* Borrowers can allocate less time to seeking financing and instead concentrate on other business;
* Borrowers can avoid the humiliation of being rejected by a bank;
* Most hard money lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific deal under consideration;
* Self-employment is not seen as unacceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.
What are some disadvantages of hard money lenders?
* Hard money loans are more expensive than bank loans, with higher interest rates and origination fees;
* The quality of hard money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on underlying real estate as a business strategy;
* Some lenders may collect non-refundable deposits without having the capital required to make the loan; they may either hope to find the capital once the loan is “tied up” or in rare cases, they may simply aim to collect the deposit with no intention of funding the loan.
What kinds of property do hard money lenders lend on?
Non-Owner Occupy Property
Multi-Family Unit (1-4)
Development of Property
When should you use a hard money lender?A borrower might consider using a hard money / private money loan in situations where he or she is willing to pay a higher interest rate and/or higher origination fees in the interest of gaining access to capital more quickly, dealing with less bureaucracy and more transparency during the application process, and finding capital to pursue an opportunity that banks will not finance, either because they are unwilling or unable to do so
What does the term "hard" mean in "hard money lender"? The “hard” in hard money lending refers to the higher price which is charged to borrowers both in terms of interest rates (typically high single digits or low double digits) and higher loan origination fees (often around 2 percent of the loan amount, versus 1 percent or less for a typical bank loan).
Who funds hard money loans?Hard money loans are typically funded by individuals or by funds that aggregate capital from multiple wealthy investors. Individuals who invest directly into a single loan are known as trust deed investors. Many trust deed investors are real estate investors/owners who invest in “bridge loans” to keep available capital working to generate a higher rate of return, rather than leaving the capital in banks earning minimal interest rates. Investors who prefer to invest passively in a fund are typically not as experienced in real estate investment and choose to pay the fund manager a fee to oversee the process of sourcing, selecting and originating a series of bridge loans.