What Is a Hard Money Loan? Term Length, Rates, and More

Kreg Bale
Kreg Bale March 20, 2022
Updated 2022/03/20 at 7:51 AM
What Is a Hard Money Loan ? Term Length, Rates, and More

What comes to mind when someone mentions a “hard money loan, “also known as a “private money loan”?

Are lenders with a sketchy reputation operating out of back alleyways and demand exorbitant rates of interest attached to a terrible term length?

When some predatory lenders attempted to “loan-to-own,” they soiled the hard money lending business. They provided hazardous loans to borrowers using real estate as collateral. Then, they planned to foreclose on the properties they were loaning money to.

Some real estate investors still have a negative perception of hard money lenders since they haven’t lately used their services. Thankfully, these lenders no longer exist in today’s market.

A hard money loan can be a helpful tool in your financial arsenal. Please keep reading to learn about hard money loans, their average term length, and their general requirements.

What Is a Hard Money Loan: Term Length and Other Basics 

Real estate serves as collateral for a short-term loan known as a “hard money” loan.

In contrast to traditional lenders like banks or credit unions, they are financed by private investors (or a fund of investors). The loan duration is typically 2 to 5 years, although your lender may extend it up to 25 years. Depending on the loan terms, you may have to pay simple interest or interest and some principal each month, with a final balloon payment.

The amount of money hard money lenders may lend to a borrower is determined by the value of the property in question. Depending on the circumstances, the collateral might be an existing asset the borrower seeks to use as security or a new acquisition the borrower intends to acquire.

The property’s value is more important to hard money lenders than a borrower’s credit history. Yet, credit is still of some importance to the lender.

Hard money loans may be obtained by borrowers who cannot receive conventional financing because of a recent foreclosure or short sale. Just as long as they still have adequate equity in the collateral. Hard money lenders may still say “yes” even when the banks say “no.”

Requirements for Hard Money Loans

When you can acquire, fix up, and sell a home rapidly for a profit using a hard money loan, it might have an enticing upside over a conventional loan. Yet, hard money loans can be dangerous. You’ll need to meet the following conditions for a hard money loan to be advantageous.

You’ll also want to keep a close eye on your hard money loan rates. Generally speaking, you’ll want to check out direct hard money lenders as they tend to provide a streamlined process for your loan application and reasonable rates.

Great Purchase Price

In most cases, unless you obtain a very cheap deal on the property, fix-and-flip real estate investments are risky.

Repairs are frequently required to get a reasonable price on a home. You can only calculate a return on your investment by comparing the expected repair costs with the sales of similar items in the region.

Your Current Cash on Hand

Your lender’s hard money will cover the bulk of the expenditures involved with the acquisition of the property and particular renovations, but you will still need to have some cash on hand. Hard money lenders may not always ask borrowers to put money down on a property, but the majority of them do.

Before doing business with a lender, lenders want to know that the borrowers have a stake in the outcome. Making a down payment also reduces the lender’s risk, leading to a lower interest rate for you.

You may include repayment for repairs in particular loans. On the other hand, the lender will require the borrower to make a down payment to begin the process. Additionally, you’ll need a reserve fund to cover the cost of property repairs.

For example, to have a licensed contractor replace the roof on a home that requires one, a borrower must put up the necessary funds. The lender will check the work after the project is finished to ensure that it meets their standards. Your lender will reimburse the cost of the roof repair to the borrower if the project is completed satisfactorily. This isn’t the case with all hard money loans. In some instances, debtors are responsible for all rehabilitation expenditures.

Experience With Real Estate

Many hard money lenders’ personal credit and financial background is not a criterion for hard money loans. More hard money lenders are eager to engage with people who can verify that they have successfully flipped houses for a profit in the past, which means reduced interest rates and fees on your loans. As a result, they place more importance on your record as a real estate investor.

They may also enable you to acquire the home with no money down by requiring a smaller down payment or even allowing you to spend nothing at all. Some hard money loan firms only deal with confirmed flippers, although this isn’t the norm.

When dealing with first-time real estate investors, there is always the possibility of taking on too much risk.

A Strong Track Record in Managing Money

Some hard money lenders may look at your credit score and financial history even if you don’t have previous experience investing in real estate. They do so to see whether you can be trusted and repay a hard money loan responsibly if you don’t have that expertise.

You may be able to get a hard money loan if you have a strong credit score, limited debt, and a lot of money in the bank (though likely with higher interest rates and more significant fees than someone with proven real estate success).

Hard Money Loan Terms: Simplified

Before applying for any loans, you’ll want to consider the loan’s expenses about any potential profit and any problems. Because hard money finance is more costly than typical financing alternatives like company loans, it works best in instances where you can repay it swiftly.

We hope that our guide has shed some light on the nuances of getting a hard money loan and its term length. And, if you’re hungry for more financial tips, you should check out our specialized real estate finance section.


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