Borrowing money, especially for real estate, is a stressful and anxious affair. Often, this is more money than most people will ever get at one time in their lives. The idea of keeping up with payments also keeps prospective borrowers up at night. Even applying brings dread, as banks and finance companies pour over credit reports, pay stubs, bank statements and tax returns. These processes are time-consuming and costly, with no guarantee of a positive determination. A more streamlined method of obtaining this kind of financing is hard money. Investors particularly like the ease and simplicity of hard money loans.

What Exactly Is a Hard Money Loan?

First of all, hard money refers to short-term mortgage loans using a subject property as collateral. Just as a bank would, the lender secures the loan with the property to be purchased. If the borrower later defaults in making payments, the lender can legally seize the property in foreclosure. Without this security, any lender--hard money or otherwise--would soon be out of business. At the same time, traditional lenders, such as banks, are not eager to acquire real estate. This is why credit history and income verification matters so much: they want to avoid default if at all possible.

Hard money differs from traditional mortgages in the following respects. Whereas the latter extends credit for 10, 15 or 30 years, the former normally allows one year for repayment--two and a half years on the outside. This is why hard money is often used as a bridge between buying a property and either selling it quickly or obtaining a longer term, permanent mortgage. Hence. this type of lending appeals to property wholesalers--or flippers--who count on a quick resale before the entire loan amount comes due. The house or building is renovated during this time. Oft times, the entire amount borrowed, with interest, is due in one balloon payment.

Why Obtain a Hard Money Loan?

Hard money does not make sense for everyone, of course. Those seeking a primary residence, who have excellent credit and the assets to back it up, do better with a bank or other financial institution that makes traditional fixed- and variable-rate mortgages. Nevertheless, there is a legitimate market for hard money among investors, builders and developers. The benefit to flippers--as noted--is in the time saved in getting the funding. While a bank loan can eat up six to eight weeks before approval, hard money lenders can make the same decision in one week.

Other investors also appreciate the efficiency of hard money. If a potential landlord accurately estimates the cash flow of an apartment building, he or she might opt for quick cash before a competitor makes an offer. Developers and home builders--under similar pressures--will likewise pursue hard money for the same reason. One category of borrower that may think twice about this kind of financing is buyers with impaired credit. Although the idea of avoiding credit checks and missed payment explanations is attractive, hard money is expensive. Wise borrowers will count the cost and have a clear plan for repayment.

Who Lends Hard Money?

Yes, hard money is indeed expensive. In an era when major financial institutions offer interest rates between three and five percent, hard (or private) money generally demands 10 to 15 percent--and upfront points on top of that. This is because hard money lenders are often sole investors or tightly knit partnerships. Their constituency is not the general public but a narrower category that can absorb the high rates and points while still earning a profit. They look upon their borrowers as partners as much as customers. Repeat business is important to them. Although they are not overly concerned with creditworthiness, private lenders have no more interest in holding foreclosed property than do banks.

How Do I Obtain Hard Money?

One option in finding private money lenders is to simply look online through Google or another search engine. Many of these investors have websites that describe their requirements and procedures. Still, it is hard to get a read on their reliability and competence simply by scanning their online business card. A better recourse is to find a reputable hard money source through a local real estate investment club. Also searchable on the internet, these organizations bring investors, financiers and realtors together for mutual referral and education. Each, therefore, has a vested interest in dependability and integrity.

Hard money loans serve an important niche in the real estate business. Many times, they result in win-win scenarios for both lender and borrower. Central to success with private lenders is presenting a viable plan that ends in full repayment to the mortgagee and profit for the mortgagor. Otherwise, loan rejection or, worse, foreclosure loom large in the future.

Published by Calida Jenkins