Hard Money Loan
What is a Hard Money Loan?
A hard money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years.
A hard money loan, usually taken out for a short time, is a way to raise money quickly but at a higher cost and lower LTV ratio. Terms of hard money loans can often be negotiated between the lender and the borrower. These loans typically use property as collateral.
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Pros:
- No minimum credit requirement: Hard money lenders tend to rely solely on the value of the collateral securing the loan and don’t take the borrower’s credit score into account.
- Quick closing time: Rather than the loan closing process taking weeks and weeks, hard money loans generally close in a few days.
- Short terms: If you expect to repay the loan quickly, even a high interest rate may not add up to a large bill.
Cons:
- High interest rates: Because the lender isn’t taking your credit score into account, the loan is considered riskier and earns a higher interest rate than other loan types.
- Lower loan-to-value (LTV): In a hard money loan, you may be able to borrow up to only 75% of the asset’s value. Meanwhile, you could borrow up to 85% in a home equity line of credit (HELOC).
- Risk of losing the collateral: If you default on the loan, you’ll lose the asset you put forth to secure the loan.
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