What is a hard money lender?

“Hard Money” – what is it?

Real estate loans from private capital lenders rather than banks or institutional lenders like life insurance companies or pension funds are referred to as “hard money” loans. The term “hard” loans was first used to refer to loans that were more complicated and challenging (or “hard”) to complete than the typical real estate loans that banks support. This challenge is occasionally referred to as “hair,” as in this loan.

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How does hard money benefit a borrower?

Unlike banks, which can take a few months, private capital lenders can decide quickly—typically within a few days. They can fund swiftly – often in just a couple of weeks – again considerably more quickly than banks. Hard money lenders frequently require much less documentation than banks do, and they frequently agree to ignore problems that might cause a bank to reject a contract. A loan with a bank can be killed by problems such a lack of considerable cash liquidity or a lack of guarantors with strong financial statements, yet the same deal may be funded by a private capital lender.

What are the downsides to a hard money loan?

Private capital loans have the major drawback of always being more expensive than institutional or bank real estate financing. In comparison to standard bank rates in the 6% range (with life companies occasionally supporting loans as low as 5%), interest rates are higher and can range from 9% up to 15% depending on the lender. Bank loan fees typically range from 0.5% to 2.0%, however upfront fees charged by hard money lenders can range from 2% to 5% or more. Also, the terms of hard money loans are shorter than those of institutional loans. The normal period of a hard money loan might range from six months to three years, although banks can fund up to to 5 years and life companies can fund 15 to 30 year terms.

How Do Hard Money Loans Fund Loans?

Hard money loans are financed through a wide range of sources of financing. The most typical are described in the list below:

Priviate Individuals

Individual investors looking for alternative investments frequently utilize their own personal funds—which may occasionally include IRA funds—to finance loans in their local communities. These lenders frequently finance loans between $50,000 and $500,000, occasionally even more. They are responsible for carrying out the necessary research and loan evaluation. The private investor then completes the real estate loan closing and servicing. Although the payout may be favorable, those who are doing this on the side run the danger of incurring expensive blunders.

Local and Regional Mortgage Investment Funds

These businesses specialize in lending and may fund larger loans, usually up to $5,000,000 or more. There are various kinds of businesses that carry out this lending, each with a unique business plan.

Lender Finance Company

This kind of business has financially stable owners who can leverage their lending resources by establishing credit lines with other lenders. Normally, these lenders will provide up to 50% of the loan’s total amount out of their own funds, with the remaining 50% coming from the bank. In the recent past, these businesses were the main providers of capital for hard money loans.

How to find a reliable private money lender?

Look for a local private funding source. It might be particularly difficult to borrow money from lenders outside of your own state.

Verify any local recommendations by speaking with local CPAs, bankers, brokers of commercial real estate, and other professionals who may be aware of the location of the hidden funding source.

Do thorough searches for the lender on Google. You might want to think hard about choosing this lender if you discover websites listed as “Borrowers suing XYZ Lender” beneath the main lender website.

The best advice Bob could provide you is to work with an experienced real estate lawyer to assist you negotiate and close your loan with a private money lender. This may be the single most crucial action you can take to ensure that you have a loan that will work.