If you need money in a hurry for a particular project like property rehab, then a hard money loan might work for you. Hard money lenders are an alternative lender. That means any company or group or individual can be hard money lenders. They move faster than a traditional lender, which is useful if you’re in the rehab business.
Now for the fine print. Hard money lenders can come from just about anyone you can imagine. It might be a broker charging a fee. It might be a person collecting money from people who want to lend money and charge high-interest rates to make more money. The money could even come from someone borrowing money from a bank and lending it out to a rehabber. Hard money lenders charge more interest and are for short terms since the idea is that the borrower will pay the loan back sooner since the rehabber wants to sell the property as soon as possible to make a profit. Lenders will offer a wide range of loan amounts and rates to entice almost any borrower. Hard money lenders might provide same-day processing which gives a rehabber a step up compared to a traditional lender. Hard money lenders look at the value of the property rather than the borrower’s credit score. Remember you are not dealing with a bank but in some cases a person with money to lend.
Hard money lenders require some of the same paperwork as a traditional lender plus some others such as projected renovation costs and after repair value (APR), sales contract, property appraisal, repair estimates and the borrower’s financial statements. The trade-off for hard money loans is that the lender will want the borrower to put up their own money. The loan values usually stop at 70% of the ARV. Even if you can get all of the paper-work in order and get the financing, you still have to do the work and sell the property and pay the loan back. Hard money loans have definite advantages like speed, flexibility, little paper-work, and convenience. But don’t forget the high rates and short payback times.
Hard money lenders can be anyone loaning money and they can be for most any project. Besides property rehab, they can finance construction and land loans or most any purpose. It’s all in the eye of the lender and borrower. How to find a hard money lender can be a challenge but they’re out there. They may advertise or speak at real estate meetings or have websites. It’s definitely up to the borrower to do their due diligence. Once you find one, you have to meet, make a contract, provide paperwork, wait for the approval and close just like a conventional loan only faster.
It’s essential to do work in advance of getting a loan. Once you get the loan approved and the money to start, you have to start. Do things in advance like inspections to know what work you’ll have to do. New rehabbers may forget to do something like check basement walls for cracks or attics for mold. If you’re buying a boarded-up duplex that’s been vacant for months or years, you have to expect problems. If you don’t know how to repair holes or replace rotted plumbing or ancient electricity, you’ll have to hire someone, and contractors aren’t cheap. You’ll also want to consult a lawyer in advance of the loan approval so you can have your lending contract reviewed. Since you’re dealing with hard money loans, you’re not dealing with government agencies or banks that have to follow the rules and laws.
