What Is a Hard Money Loan?
Generally, when investing in real estate and needing financing, you might be thinking you have two options: a conventional mortgage or hard money loan. Though most people understand the basics of a conventional mortgage, many may wonder, “What is a hard money loan?” Here are some common differences between the two types of loans brought to us by Investmark Mortgage
What is a hard money loan?
Funding source
Lenders who fund conventional mortgages sell their loans to larger banks or to other investors. Private lenders mostly make hard money loans. The money may come from individual investors, lines of credit, or various types of investment funds. Hard money loans typically remain with the originating lender through payoff and the lender services the loan.
Time Frame
One of the biggest differences between a hard money loan and a conventional mortgage is how long it takes you to close. With a conventional mortgage, it usually takes several weeks to close. With hard money, you can usually close within a week, sometimes less. You may think it’s crucial to get the money fast when you are buying from someone who wants to close quickly.
Interest Rate
Across the board, hard money rates are higher than on conventional mortgages. This is due to the fact that hard money lenders are only loaning the money for short periods of time and not for 30 years where they would be collecting large amounts of small interest payments over time. You will pay higher interest rates on hard money loans because the lenders loan on distressed properties.
Property Type
Lenders offering conventional mortgages will typically loan on residential properties used for personal residences, as well as rental properties. These lenders place a larger emphasis on the credit-worthiness of the borrower, as well as the condition of the underlying asset. Properties that are distressed cannot be approved for a conventional mortgage. Hard money lenders lend for both residential and commercial properties, although they almost never lend money for owner-occupied properties or properties being used for personal or household use. Hard money loans are designed for distressed properties and are used by investors looking to buy and renovate, either to flip or refinance and keep as a rental.
Loan Term
Most conventional mortgages have interest rates fixed for 30-years and fully amortized over that period. Hard money loans are interest-only and typically have a term of 1 year or less.
Where to Find Hard Money Lenders?
The easiest way is to start with a Google of “Where to find hard money lenders.” A quick look and I found Hard Money Loans Directory published by BiggerPockets. Here you can browse by state.
I zeroed in on one on the top of the list called Patch of Land. Here’s how they describe their business: “Patch of Land is a private money lender that uses proprietary technology and data to provide transparent, scalable, and efficient lending solutions to real estate investors throughout the country. Patch of Land offers borrowers access to reliable capital for residential and commercial real estate projects, including short-term commercial loans ranging from $50K to $3M for the purchase of non-owner occupied residential and commercial properties, financing of rehab projects and bridge funding. We offer real estate loans that are fast, flexible, and competitively priced while providing investors leverage over their cash position. Most importantly, we strive to provide investors with best-in-class customer service.”
You will find each lender has a criteria for making loans, and you need to apply and build relationships with the lenders.
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