What is Hard Money?
Hard money loans are popular with people who buy properties to renovate them and resell them for a profit, a real estate investment strategy commonly called house flipping.
A hard money loan is a short-term loan that is secured by real estate. For house flippers, the property being flipped is used as collateral.
Hard Money Benefits
A hard money loan isn’t issued by a traditional bank or credit union, it’s funded by private investment companies or group of investors.
Because they are not traditional banks, hard money lenders can offer greater speed and flexibility when approving a loan, making funding available for people who have a broader range of credit scores, credit worthiness, and in some cases, to those with adverse credit history.
Another advantage is speed. When you go to a hard money lender, you are often working with the underwriters directly, that means no rigid one-size-fits-all packages, middlemen or red tape. An average hard money loan puts cash in the borrower’s hand in as few as 10 days, instead of the 30+ most people wait for a traditional mortgage.
When you are bidding on a property, that speed can give you an advantage over potential buyers who will need a month or more to close.
Downsides of Hard Money
Lenders usually offset the risks of a hard money loan with higher interest rates, processing fees and down payments, and while the monthly payment may be low, or interest-only, at the end of the loan term, a large payment is due. If a sale is delayed, a project goes over budget, or prices must be reduced to make a sale on time, the borrower could end up having invested a great deal of time and effort for little to no reward, or worse, lose money on the deal.
Hard money loans aren’t good replacements for traditional mortgages for people looking to purchase a primary residence for similar reasons. Because of the short duration and high interest, there is a risk of defaulting on the loan and forfeiting your property.
How are Hard Money Loans Calculated?
There are many factors, depending on the lender, the qualifications of the borrower and the property in question, but as a general guideline, hard money lenders look primarily at the value of the property being acquired. The money available to the borrower is determined by either the Loan to Value (LTV) or After Repair Value (ARV).
LTV is the ratio between the value of your home loan and the home’s value. It may seem complicated at first glance, but calculating LTV is simple, divide your loan amount by the home’s appraised value or purchase price.
The ARV is an estimate of the value of the property after repairs and renovations have been completed. While there are several factors that can influence a property’s ARV, the two primary factors are the property’s purchase price + the value of renovations.
Education and careful planning are key. When you apply for a hard money loan, you need to show you have a workable budget and timeline, and that you are ready to follow through on flipping the property. In property flipping and in hard money lending, your success is the lender’s success. You’ll want to bring the best deal possible to the table.
We strive to ensure information provided is accurate, however, every investment is unique and carries a degree of risk. The information presented should be treated as reference and not treated as financial advisement.