What is a hard money loan?
A hard money loan is a type of mortgage loan. There is no universal agreement on why they are called “hard money” loans, so let’s discuss their common features. Hard money loans typically have short terms such as 12 to 24 months and higher fees and interest rates. Hard money loans often include both purchase financing (to fund buying a property) and construction financing (to make improvements to the property). Most hard money lenders (those that make hard money loans) focus first and foremost on the value of the real estate put up as collateral for the loan. Hard money lenders usually raise the money they lend from private investors or financing groups.
Hard money lenders also care deeply about the experience of the real estate investor and the investor’s business plan for the property. Some, maybe even most (but not all) hard money lenders these days look at the investor’s credit score and depth of credit. Although most hard money lenders are more lenient on credit than traditional mortgage lenders (for example, they may have lower minimum credit score requirements).
Another important piece to note is that hard money loans are typically used by real estate investors for business purposes, such as house flippers or investors purchasing an investment property, whether a commercial property or a residential rental property.
Hard Money Loans vs. Construction Loans vs. Renovation Loans
The term “construction loan” generally refers to a loan for ground-up construction of a new home or commercial building and includes the purchase financing for the underlying real estate. A renovation loan is the type of financing someone would need for remodeling an existing building. The main difference between a renovation loan and a hard money loan is that the renovation loan is only structured to finance renovation costs, not the purchase of a property.
Hard Money Loans vs. Bridge Loans
Bridge loans are a subset of hard money loans. The key difference is that bridge loans do not include the renovation or construction component. An example of this would be when a real estate investor finds a great deal on a piece of real estate and needs a short term loan to hold it briefly before selling it to another investor to fix and flip.
Hard Money Loans vs. Traditional Loans
Conventional mortgage financing, including loans from most local banks, has a stringent approval process that focuses heavily on a borrower's credit score, pay stubs and cash reserves. Even though hard money loans have more onerous loan terms, such as higher interest rates and sometimes prepayment penalties, such loans are much easier to qualify for than conventional mortgage loans and typically don't require tax returns or income documentation. If you want to purchase an investment property but have poor credit or credit issues whether on personal loans or mortgage loans, you will want to consider other loan options, such as hard money loans.