Why People Use Hard Money Loans

by on October 26, 2011

In years of experience with loans, we’ve never actually seen or heard of anyone getting a hard money loan.  I guess that’s because they’re not commonly used.  At least not in our circle of investors.  In general, hard money loans are used to help finance real estate, and are often used when other credit is hard to come by.  Here, we’ll discuss what a hard money loan is and why people use them.

What is a Hard Money Loan?

First of all, hard money loans are called “hard money” because they come with pretty strict (or hard) lending rules.  These types of loans don’t come from banks, but rather from hard money lenders.  You may have seen some signs for some type of hard money lender in your area.  They often have terms like “funding”, “financial group”, “coalition” or “lending” in their titles.  There are also lots of hard money lenders on the Internet that offer nationwide loans.

Hard money loans are lent using real estate as collateral.  Generally, these loans will not exceed 65 – 70% of the value of the collateralized real estate.  They also carry interest rates that are much higher than traditional loans, sometimes more than double the rate.

Why do People Use Hard Money Loans?

Hard money loans are typically used as a last resort, and are often associated with distressed financial situations.  Although sometimes hard money loans are used to help real estate investors find creative or alternative ways to finance their real estate project.  During new construction, bridge loans are used to borrow money that will then be paid back when construction is complete and permanent financing is attained.  Hard money loans can be used similar to this but for existing or distressed properties.

Usually, hard money is only sought when traditional bank financing is not available.  Because hard money loans are based on underlying assets, credit scores are not as important as with traditional financing.  There are many reasons why someone would not qualify for a traditional loan from a bank.  These include: poor credit history, too much credit, not enough income, and a property that is not move-in ready or not fully completed.

Because of the high interest rates associated with hard money loans, they are a risky type of loan and should be used for as short as possible.  For example, let’s assume you acquired a hard money loan to help buy an apartment building that you couldn’t get a traditional loan on because the apartment complex was not fully rented and the rents did not justify your loan.  Your goal should be to get the property in order, get it fully rented, and increase existing rents in line with market rents.  Once you’ve done this, you would want to apply for a traditional commercial loan to pay off the hard money loan.

In summary, hard money can be an important tool in your real estate investing, but only if it is used as a temporary fix until you can get your property refinanced with a better loan.

{ 10 comments… read them below or add one }

Hard Money Seattle July 27, 2012 at 2:47 pm

Hard money loans and Hard money lenders have long existed as an alternative source of capital. In today’s market, banks have very strict lending guidelines and a hard money loan may be the only solution for a borrower.
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Hisako Coker September 3, 2012 at 1:28 pm

I think one of the reasons why people use hard money loans is that it is easy to avail, and you can get the money faster unlike with traditional loans. It can be a great option for people who are encountering an emergency and badly needed money. Traditional loans from a bank can take up to 5 days or even weeks and months for your loan to be approved unlike with hard money loans that you can get cash in just 3 to 5 days.

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Arizona hard money loans October 10, 2012 at 8:37 am

Hello Chris, You have given a great definition for hard money loans. Your content is worth reading. Thanks for sharing the post.

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nri demat account January 2, 2013 at 11:39 pm

Hi. I had just stopped by your blog and found your content useful. Hard money is the best choice whenever a loan application is rejected at the traditional banks even the interest rates were high. Thanks for the post.
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Jenny March 8, 2013 at 6:50 am

thank you for your post. hard money is nothing but a financial backing from private investors in the form of a loan.
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Pat Drummond March 11, 2013 at 12:13 pm

Hard Money Loans are probably the last option for those with bruised credit. However, they can get quite expensive. The many stipulations and higher interest rates may make most people turn away, but these kind of loans can help individuals obtain a car or mortgages. Depending on costs and time, it may be easier to focus on improving your credit rating so that you can obtain a loan through more common ways.

Cheers.
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Vicky March 31, 2013 at 10:05 am

1 of the main reasons on why borrowers chose hard money loans.
It’s cause it’s much easier to obtain and lesser requirements than a bank loan.
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Donald Quixote August 28, 2013 at 5:13 pm

Word of caution…these are not at PayDay loan level but they do have pretty high interest rates…the good thing is that a lot of individuals who have poor credit or better who lack credit can easily get a loan because of the hard value of the asset they are putting up as collateral. That being said someone who has poor credit may have spending habits that will only end up with them losing their house.

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Francis December 19, 2013 at 12:55 am

When easy money is hard to come by then hard money is a great resort. It has a lot of advantages over borrowing money from bank. The process is fast and easy with more suitable terms. Hard money lenders don’t need to conform to anyone else’s underwriting standards.
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Caryl Anne March 27, 2014 at 3:52 pm

Great article! These types of loans, when used properly, can really help an individual out! They are usually fast and easy, which can help decrease stress when strapped for cash. Thanks for sharing!
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