So you’ve heard people mentioning hard money and you’re left wondering, “What is hard money?” Hard money refers to a short term loan you can use to buy and/or renovate commercial or residential real estate. You can also use it for land purchases. The loan requires some asset to be put up as collateral, such as another property that you already own.
Being a real estate investor requires you to act quickly when acquiring properties. This is where hard money comes to the rescue. It enables you to quickly close a lucrative deal which you would otherwise miss if you follow traditional loan procedures.
Hard money loans do not conform to conventional lending standards. You can use it temporarily as you wait to acquire a regular form of financing for your property. Many investors use a hard money loan to purchase and renovate a property, then after a year or two, are able to qualify for a traditional mortgage which is used to refinance and pay off the hard money loan.
Often, people contrast hard money loans with soft money loans. The latter refers to physical cash that’s not backed by any collateral. A soft loan could also mean indirect payments made to financial services like brokerage commissions.
Hard money borrowers
These are investors who, for one reason or another, cannot afford bank loans and want to acquire properties really fast. Furthermore, individuals with poor credit and those who need quick cash for business are candidates for hard money.
In return, hard money borrowers have to pay a higher cost of borrowing and in a short loan term. Hard money is also a good option for people who are facing foreclosure. Many times, foreclosure requires quick action to stop it. Perhaps you have considered all the possible financing options but to no avail. Then, a hard money loan will give you the extra cash needed to stop foreclosure.
What are the sources of hard money loans?
The funding comes from private lenders or better known as hard money lenders. They get finances from a plethora of sources. Like typical financing institutions, hard money lenders use people’s money which they lend to investors with a promising rate of return.
Others lend their personal finances to borrowers. Evidently, hard money lenders are interested in financing individuals who are willing to give a particular rate of return.
Perhaps you want to know, “Why is hard money preferred? Well, wouldn’t you be interested in a form of funding that offers a predictable stream of cash? In case of a fix-and-flip deal, the money gives you a budget certainty when planning to pay off the existing mortgage and, at the same time, extracting equity from the same property.
Other forms of hard money you should know
Hard money is not just a thing for private lenders. In the political arena, it means monetary grants by politicians or government action. Such contributions come with strict regulations and limitations such as how the recipient should use the money.
However, donations by political parties without limitations are referred to as soft money. Politicians can direct soft money to any project without giving conditions.
What blunders do people make when seeking hard money loans?
If you want your hard money loan to run smoothly, there are a few mistakes you should avoid at all costs.
Not confirming the penalties, fees and extra costs
Before you sign a deal, read and understand the fine print. The last thing you want is to be held liable for ignorant mistakes. It would be awful if you get fined for something you weren’t aware of.
Skipping the pre-approval stage
This is a huge mistake that most borrowers commit. Never sign a hard money loan contract before the lender pre-approves you. Consult a trusted lender and get pre-qualified. Obtain a proof of funds to seal the deal so the hard money lender can see you are serious.
Shunning off hard money because of a higher interest rate
Hard money loan rates range from 5% to 16%, on average; though this fluctuates based on overall market and economic conditions. This is higher than what you are used to but for a good reason. Do not let the rates scare you. You can negotiate with the lender who might allow you to make interest-only monthly payments. These installments are more manageable as you wait to make a lump sum amount at the end of the loan term. The key is finding investment opportunities where the profit far exceeds the cost of the capital required.
Keep in mind that a hard money loan contract is like a professional partnership. You must stay committed until the end.