How Does a Hard Money Loan Work?

by Allen Young ; Updated July 27, 2017
How Does a Hard Money Loan Work?

What is a Hard Money Loan?

A hard money loan is a real estate loan secured by real property. Most hard money loans are short-term loans of 1 year or less. However, there are key differences between a hard money loan and a regular conventional loan made by institutions such as bank or hedge funds. Hard money loans, also called private money loans, are made by private investors or a group of private investors. The criteria the lender uses also differs in a hard money loan. Most institutional lenders based their lending decision on the qualifications of the borrower's ability to repay the loan. Hard money lenders will mainly focus on the value of the property to decide whether to lend and how much to lend. They will look at a borrower's qualifications, but will mainly use the property or the deal as their main consideration. The main security is the property itself. The lender must be comfortable with the value of the property before deciding on how much to lend. The value is determined by an independent appraisal. Typically, a hard money lender will loan up to 70 percent of the property's value.

Advantages of Using a Hard Money Loan

Hard money loans are very expensive in both the interest rate and the fees charged compared to conventional loans. Still, there are advantages to utilizing a hard money loan. These loans are often more readily available, when money is often tight with conventional loans. Hard money loans also are also to close much faster and with less paperwork. This allows real estate investors to take quickly take advantage of good deals before other investors can.

Applying for a Hard Money Loan

If you decide that hard money loans are a good option, then the next step is applying for one. You must fill out a loan application much like a regular conventional loan. Provide all relevant data on your financial situation as well as on the property. Include all relevant details on the deal in your loan package. This will speed up the process. Hard money or private loans are more relational than regular loans. So take the time to build long-term relationships with private loan brokers and investors. It will make the process smoother in the future if you have an existing relationship. Hard money loans vary greatly in fees and interest rates. So shop your loan around to get the best deal.

About the Author

Allen Young is an experienced writer on such subjects such as real estate investing, mortgages, and personal finance. Young has also written on sports, travel, and parenting. Currently he is the president of Crestwood Capital Group.

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