Hard Money Lenders

Introduction

A loan from a Hard Money Lender is most often used for the purchase of real estate but the loan can also be taken out to refinance, renovate or develop property. A hard money lender is an alternative to banks and financial companies, and gives a loan secured by real estate. Hard money loans are common among real estate investors in the United States and Canada.

What Is a Hard Money Lender?

A hard money lender makes short term loans to real estate investors. Hard money lenders are so-called because the funding is backed by a ‘hard' asset, usually property. The loan is more expensive with a higher interest rate than most other lenders, but the loan is provided quickly, requiring fewer documents. The loan is usually from 6 months up to three years.

The loan is never for 100% of the purchase price; instead, a sufficient down payment, or equity in the property, is required – typically 25% or 30% for residential real estate and 30% up to 40% for commercial property. As previously mentioned, these loans are asset-based (secured by real property), and do not depend on a borrower’s creditworthiness. If the borrower is unable to repay the loan, the asset will be taken by the lender.

Some lenders will demand the value of the collateral (the asset) be higher than the amount of the loan in order to reduce their risk in the transaction. This higher amount of collateral gives the lender a sense of protection.

When A Hard Money Loan Is Used

Hard money loans are utilized for short-term financing; often when you require fast funds and have no hope getting a traditional loan. A hard money loan enables a borrower to buy real estate very quickly, often before the property is offered on the open market. Also, less documentation is required.  Moreover, a hard money loan is a flexible loan, and you can often, depending on your situation, negotiate the payment schedule plus other features.

Paperwork Involved

  • Deed of Trust

A trustee is assigned to take possession of the property deed during the period of the loan. This ensures the lender and the borrower comply to the terms in the loan agreement. When the loan is fully paid, the trustee turns over the deed to the buyer.

  • Promissory Note

The note documents the borrower's promise to pay a specific amount on specific dates as agreed. It also contains the rules that the trustee has to follow on behalf of both parties.

  • Loan Agreement

A document providing an overview of the agreement. Information about the property in question, amount of the loan, interest rate, term of the loan, and consequences if payments aren’t made.

  • HUD Closing Statement

A federally required document outlining all costs and fees associated with the property purchase, including all fees to be paid at closing.

  • Personal Guarantee

Considered optional but often required for a hard money loan. Details the agreement between the borrower and lender that collateral for the loan will become the property of the lender if full payment  is not made.

How To Find A Lender

Search Online – Type “hard money loans” or “hard money lenders” for your town/area into your browser and check through the results.

Real Estate Investment Clubs – Many towns and suburbs have investment clubs. You can also search for clubs on Facebook.

Real Estate Agents and Brokers – They may be aware of where to contact a hard money lender.  

CPA’s and Attorneys – A hard money lender may be a client of theirs.

Borrowers will often develop a good relationship with a hard money lender and return to the same lender when they need short term money for the purchase of real estate.

Conclusion

With their high interest rates and high down payments, a hard money lender will often be the last resort for a newcomer to property investing. But if you only need money for a short period of time eg to buy a house, or fix and flip, then a hard money loan could be right for you. If a borrower is realistic about their situation, having done their sums accurately, and knowing they can repay the loan on time, such a loan to secure a good investment can be well worth the extra cost.

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