How Hard Money Construction Loans Work

by on June 18, 2012

If you’re trying to figure out more information about hard money loans, chances are you are looking to get some type of construction or bridge loan.  That’s because hard money construction loans are really only a temporary solution to funding a property or construction project.  Here is a quick and easy way to learn and understand how this process works.

For starters, you need to search around for lenders.  If you can get a bank loan or home equity loan, it would probably be a better deal, but if the only thing you have to borrow against is the hard value of the property or project, then a hard loan may be your only solution.  I’ve written another post specifically about why people use hard money loans if you want to read more on this subject.  To find a lender, check with a local mortgage broker or two, or find a broker that specializes in hard money loans.  You can also go directly to the lenders.  Most hard money lenders have company names like funding, lending, coalition or financial group.  Search around and you will likely have a few options nearby.  There are suprisingly more of these types of lenders than you’d think.

how to get a hard money construction loanOnce you find a few lenders or loan products, compare the rates and terms to see which is the most favorable.  Because of their risk, these types of loans have higher interest rates and lower durations than other loans.  However, the terms can vary dramatically, so make sure you compare your options and choose the overall best loan.

Once you get your loan you will receive the money via wire transfer or cashiers check.  You only have a short period to pay back the loans, usually not more than five years.  Oftentimes, even less time.  You’ll have to make sure that you put the money to good use so that you can finish your construction project, remodel, or other project you are borrowing for.  You’ll need to have the project finished and ready to apply for a new loan before your hard loan expires.  That means time is usually of the essence.

When your project is finished, you borrow against the completed construction project and use the new loan to pay off the hard loan.  That’s really all there is to it.  Besides making sure that you find the most favorable rate and terms, the most important thing you need to do is to refinance the property and pay off the loan on time.  If you don’t, the hard money lender will probably end up owning your property instead of you.

Have any other comments or questions about hard money construction loans?  Leave us a comment.

{ 6 comments… read them below or add one }

harsha June 21, 2012 at 7:44 am

However, now things have changed. Thorough investigation is being done before sanctioning loans. In the name of newer credit policies, getting loans has become more difficult. Even after getting good deals on home prices, people who are planning to buy a new house are struggling to get loans form banks. Banks are rejecting the loan applications based on many factors.

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Mahee July 6, 2012 at 12:34 pm

Points on a hard money loan are traditionally 1 to 3 more than a traditional loan, which would amount to 3 to 6 points on the average hard loan.

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Hard Money Seattle July 27, 2012 at 1:58 pm

Hard money loans may not be the first choice for a borrower because of the costs, but it is an important solution for borrowers that may not get a loan any other way.

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Dave From 12 month loans September 10, 2012 at 2:10 am

It’s got to be said these should only be used as a last resort, the dangers of taking out a hard money loan can be severe if it’s not paid back within the allocated time.

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Donald Quixote August 28, 2013 at 5:10 pm

As some other have commented you need to be wary with hard money loans because of the increased costs of using them, however, they do still remain a viable option especially for those who can only borrow against their property.

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Mark Watts July 21, 2014 at 9:10 am

An interesting read Chris. In the UK bridging finance is becoming really quite popular again and people are using it to buy property at auctions and also for home renovations. You do have to be wary as Donald says but at the end of the day the higher fees are here for the convenience of getting the capital quickly.

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