Hard Money Definition: A Beginners Guide to Hard Money Lending

In the real estate world, the different types of loans and investing can be overwhelming. If you’re looking for more information on alternative financing, you’ve come to the right place. We’ll go over the hard money definition you need to get the right funding.

From flipping properties to investing in more than one home, there are many reasons why developers and investors choose hard money loans. We’ve rounded up the different types of hard money loans, how to use them, and what you need to qualify. Here’s your go-to guide to hard money lending.

 

Hard Money Definition

So, what is hard money? A traditional lender will have a long and detailed application process to qualify you for a mortgage. This is for good reason. They want to know that an applicant can pay back their loan- this is where a hard money lender comes into play.

For real estate investors, the terms of a loan will look a lot different. You aren’t planning on keeping a home for thirty years and you’ll likely want to invest in more than one at a time.

A hard money loan is a loan backed by a physical asset instead of the recipient’s creditworthiness. Real estate is typically the main backer of hard money loans. You may also see the term hard used in reference to political campaigns and student loans.

 

Real Estate Investing With Hard Money

When it comes to real estate investing, hard money borrowing is common. These types of loans are for property developers, investors, and distressed buyers. Homebuyers looking to buy more than one property can also use these loans.

Traditional loans come with long loan terms. They take longer to qualify for, and they can tie up your money and your credit. These don’t always make sense for investors looking for short-term loans.

 

Construction Loans

A construction loan will help a real estate developer move forward with construction. These hard money loans are also for real estate construction costs. Once you receive the green light on your construction project, you can use a hard loan to get started.

 

Bridge Loans

A bridge loan will help a home buyer get a home fast. In a seller’s market, you’ll see homes get snatched up quickly. A bridge loan can help you buy a home before you sell your current home.

You’ll have cash for a down payment without needing to wait for your house to close. You can also get this loan if you don’t qualify for a traditional mortgage.

 

Fix and Flip Loan

Fix and flip loans are a great option for home flippers. You’ll be able to get the cash you need to buy the home, renovate it, and get it ready to sell. Once you sell the home, you’ll pay back the loan with the profits.

For real estate investors, fix and flip loans give the cash they need to make changes to the house. One of the biggest obstacles house flippers have is access to cash. You need to spend money on the home to get it sold.

If you don’t have the money for a down payment and the renovations, fix and flip loans can help.

Fix and flip loans are also short-term loans. These loans are intended for flippers to pay back once the home sells. The terms aren’t set up the same as a 30-year fixed mortgage.

 

Owner Occupied Loan

If you don’t qualify for a traditional mortgage, an owner-occupied loan is a great option. These loans can help a buyer get into a home using an asset as collateral. You can borrow against a property you own.

 

Case-By-Case Loans

Case-by-case loams are granted by private firms or investors. Case-by-case loans are lent on an individual basis. These also don’t need to be borrowed against a home. You can borrow against another asset you own such as a car.

 

How Does a Hard Money Loan Work?

Hard money loans can be really helpful in a pinch. These loans don’t require a down payment or for your current house to sell. You’ll see access to cash quickly. If you’re excluded from traditional mortgages for any reason, hard money loans can be the answer.

Hard money loans provide cash to real estate investors, developers, and homebuyers with capital quickly. To get a hard money loan, you’ll first need to be assessed by a lender. This process involves looking at the asset you’re trying to buy – you’ll need to prove the value of your investment will pay the loan back.

Once you’ve agreed upon a price, your lender will choose your interest rate. The annual interest rate will be higher than a traditional mortgage, yet the qualifications are more relaxed. You’ll also pay back the loan faster – hard money loans will usually need to be paid back within a year.

One of the best benefits of a hard money loan is their processing time. You can get a loan much faster than with a traditional mortgage. When you see a time-sensitive real estate deal, this allows you to move on the purchase faster. You may be able to get the funds you need within a week.

 

What you Need to Qualify for Hard Money Short-Term Loans

To qualify for a hard money loan, you need to show your home plans. If you’re flipping a home, you’ll need to show how much you’re purchasing the home for and how much you’ll need to renovate it.

You’ll also need to show comps for other homes in the area proving your sales price is achievable. If you overspend on construction, for example, you may not make the profits you need to pay the loan back. Before you apply, you should have all this information handy.

Gather the address of the home you’re going after, the purchase price, your exit strategy, cost of potential construction, the scope of the work, and after repair value or ARV. This information is what your lenders will need to see to qualify you for the loan. They want to make sure you’ll be able to pay back their investment.

If you’re buying a new home with a bridge loan, you’ll need to show what your current home will sell for. You’ll also need the stats for your new home. If you have $100,000 in equity, for example, you can borrow $50,000, for a down payment on a new home and know that you can pay it back with the profits.

 

Ways to Use a Hard Money Loan

A hard money loan can be used for a number of situations. You can use them to buy a home before your house sells or to buy an investment property. A house flipper, for example, will use this loan to buy a home, renovate it, and sell it for a profit.

You’ll have access to cash so that you can complete construction and get the home sold.

Non-qualifiers with little assets can also use hard money loans – let’s say you have a low credit score. If you have a higher net worth and a steady income, you can get through the loan hurdles using a hard money loan. This alternate funding source is backed by your assets instead of your credit.

Homebuyers in need of cash can also use a hard money loan. These bridge loans offer them access to funds before their current homes sell. This gives them the down payment they need until closing.

Once your home sells, you pay back the loan using the profits.

People looking to make a quick profit are also hard money loan consumers. These real estate investors buy a distressed property, for example, and resell it for a profit. They may sell it to home flippers or real estate developers.

In these situations, you’ll make a quick profit, without doing any work to the home.

 

How to Find a Hard Money Lender

If you’re a real estate investor, a house flipper, or an individual looking to buy a home, a hard money loan might be for you. This hard money definition guide will help you make an informed decision. We’ve rounded up everything you need to know about the different hard money loans and how to use them.

If you need access to cash in order to buy your next home or investment property, a hard money loan can be the answer. When it comes to real estate, there are always alternative options that offer more flexibility and more favorable terms.

With a little homework, you can be well on your way to a new home or flip project. For more real estate and investment tools, check out the finance section.