Hard money lending is often misunderstood as a borrowing option. While everyday consumers and investors may see hard money as difficult to obtain, the reality is that hard money loans are accessible and can offer several benefits to companies and individual investors.
To figure out whether this option is right for you, here is an in-depth look at the definition of hard money loans, revealing their uses and benefits.
What Is a Hard Money Loan?
A hard money loan is an asset-based loan secured off of the equity in an existing investment. Also known as private equity loans or short-term real estate loans, hard money loans are financed by private investors, companies, or families.
Some of the distinctive features of these loans (versus conventional loans funded by traditional banks) include:
- Fewer upfront requirements: Unlike traditional loans, hard money loans don’t usually require extensive paperwork, appraisals, and long wait times.
- Faster approvals: Given that hard money loans are based on the value of real property (not credit scores)—and that they don’t require extensive paperwork—they can usually be funded much more quickly than traditional loans.
- Higher interest rates: These are meant to cover the risks lenders may take on in funding hard money loans.
- Shorter terms: Hard money loans generally have to be repaid within 12 months, with extensions available in some cases (and those extensions not usually extending beyond 5 years). This is a much faster timeline than traditional loans, which can have terms of 10, 20, or 30 years.
Who Takes Out Hard Money Loans?
Typically, the borrowers who are best suited for hard money loans include:
- Real estate investors
- Property owners
- Entrepreneurs
- Business owners
- House flippers
- And others
It’s crucial to point out that, while private equity loans can be useful for property investors and owners, these loans are not usually the best options for those who reside at their properties. Conventional loans tend to be better for owner-occupied situations.
What Can a Hard Money Loan Be Used For?
Given how they are obtained and how quickly they need to be repaid, hard money loans are typically best suited for:
- Borrowers who may have credit issues
- Real estate investors involved in transactions that require fast funding
- Shorter-term real estate projects that allow for quick repayment of the loan
Here’s a look at some of the most common types of hard money loans available, along with a definition of each loan type.
Construction Hard Money Loan Definition
Hard money loans can be ideal for new construction, offering flexible terms that can be tailored to a specific project. Factors like the property location and use, as well as the construction plans and the investors’ experience, can impact the funding, pricing, and terms of construction hard money loans. Ultimately, these loans are repaid from the proceeds of mortgages from the finished building or project.
Transactional Hard Money Loan Definition
Investors who need a quick influx of funds to complete a deal with a fast turnaround time can benefit from transactional hard money loans. In fact, this borrowing option can be the best choice for transactions that involve:
- Auction purchases
- Short sales
- Double closings
- Wholesale real estate deals
Bridge-Gap Hard Money Loan Definition
Sometimes, investors may face a conundrum—they may have a great opportunity but lack access to the longer-term financing they need to seize the opportunity before it disappears. When this happens, bridge-gap loans can offer the ideal solution, supplying interim, short-term financing until the longer-term financing comes through.
A common example of this can arise when investors are buying and selling homes at the same time. They may not have access to the funds they need for down payments and other costs of buying a home (because their funds are likely tied up in the home(s) they are selling). In these cases, this type of hard money loan can bridge the gap in financing, providing short-term funding to purchase one home while the investor waits for the sale of another.
Fix-and-Flip Hard Money Loan Definition
When investors need to update, renovate, or rehab a property before putting it on the market, a fix-and-flip hard money loan is a great option. Also referred to as rehab loans or renovation loans, this option can provide the additional funds needed to raise property values and asking prices, so investors can make more from the sale.
With these short-term loans, however, it’s important to ensure the renovations can and will be completed over a specific time frame (to avoid defaulting on the loan).
Foreign National Funding Definition
When foreign nationals want to invest in property in the U.S., getting a conventional loan may be far more challenging and costly than securing a hard money loan. In fact, if foreign nationals have little to no credit history in the U.S., traditional bank loans may be entirely out of the question.
For these investors, private equity loans can be the financing solution they need to bypass credit checks and complicated loan review processes.
What Are the Benefits of Hard Money Loans?
Hard money loans aren’t for everyone, but they can provide some significant advantages (over traditional bank loans) to some borrowers. Here is a look at how and when hard money loans can be the best option for a borrower.
Hard Money Loan Benefit #1: No Early-Payoff Penalties
One of the more notorious aspects of bank-financed loans is the inability to pay off the debt before the term expires. This early-payoff penalty essentially punishes borrowers for trying to get ahead on their financial obligations. It may even mean that borrowers who are locked into these loans end up paying far more in interest over the term of the loan because there is no way to pay early and avoid those interest payments.
With a hard money loan, however, borrowers can usually repay the funds whenever the money is available. In other words, there is NO early-payoff penalty for hard money loans. That can provide borrowers with greater freedom and flexibility to pay off a short-term loan.
Hard Money Loan Benefit #2: Quick Approvals & Funding
With traditional banks and lenders, borrowers usually have to complete pages of forms and piles of paperwork. And that’s before things like appraisals and property inspections happen. All of that paperwork is then carefully reviewed, often by multiple people. These checks and balances are common in the financial world, helping lenders evaluate risk and protect themselves.
For investors who need to move quickly, however, traditional lenders can make the borrowing process so cumbersome that a deal or project is just not possible on their timeline.
Hard money loans can offer the perfect antidote to that. In fact, these private equity loans have a streamlined review, approval, and funding process. That can mean investors are able to get answers and, potentially, funds within days—as opposed to the weeks or months it would take to get a loan funded via a conventional bank.
Hard Money Loan Benefit #3: Flexible Terms
The terms of traditional loans can be just as rigid and obtuse as the process of approving them is. For borrowers, that can mean that they are locked into strict loan terms that may not fit their situation or needs.
Of course, rigid loan terms can work just fine in some circumstances, like in the case of a conventional mortgage where borrowers need and want time to repay loans at some fixed rate.
With investors who need some flexibility in repayment terms, however, a conventional loan just won’t cut it. That’s another major advantage of hard money loans, which give lenders and borrowers the flexibility to adjust the terms on a case-by-case basis. That can end up saving investors time and money in the long-run.
Are There Disadvantages to Hard Money Loans?
As noted above, hard money loans are not for every situation or borrower. That means that the same things that can be advantageous for some borrowers, when it comes to hard money loans, can also end up being downsides for others in different situations.
Specifically, the unique features of hard money loans—like short, flexible terms and asset-based financing—can present challenges for borrowers if or when:
- They are unable to repay the loan on a shorter timeframe.
- They need credit-based financing because they lack assets to use as collateral for a hard money loan.
- They plan to stay at or in the property they are renovating, rather than putting it on the market.
- They are not confident that new construction or a home renovation project will be completed within a specific timeframe.
When you’re weighing out the pros and cons of hard money loans, you need more than a hard money loan definition and generalities to make an informed decision. You need to talk to the experts at COHI, LLC. We can help you figure out if a hard money loan is your best borrowing option.
How Do Hard Money Loans Work?
When a borrower is ready to take out a hard money loan with a private equity lender, here’s what generally happens:
- The borrower completes and submits a loan application: This usually includes some supporting documents.
- The lender will review the application materials: If the loan is approved, the lender will send the borrow a term sheet, with pricing, interest rate details, and other terms of the loan.
- The borrower reviews the term sheet: If (s)he wants to accept the loan offer, they sign the term sheet and send it back to the lender.
- The loan is closed: Depending on the nature of the loan, additional things may happen, like site visits and taking out title insurance. Once the final steps have been completed, the loan will be funded.
- The borrower receives and uses the funds: Whether borrowers are investing in new properties or renovations of existing ones, they will have to start repaying the loan according to the agreed-upon terms, detailed in the loan documents.
How Much Do Hard Money Loans Cost?
Hard money loan costs vary from case to case, depending on:
- The loan amount: Loans with greater amounts borrowed can naturally have higher costs, as lenders are taking bigger risks in trusting borrowers to pay back more substantial sums.
- The collateral: The value of the asset(s) used to secure the loan can also impact how much the loan costs. Typically, some type of property, land, or developed property serves as collateral for hard money loans.
- Other factors: These could include the type of loan, the borrower’s experience with certain types of projects, and more. Additionally, certain lenders may calculate other fees, based on unique factors dicated by their own policies or operations.
While an expert at COHI, LLC can give you a more specific answer to this question (after learning more about your situation), here’s the bottom line on hard money loan costs—they can save you time, give you access to flexible loan terms, and put loan money in your hand sooner than any conventional loan would.
Let’s Talk About Your Best Options for a Colorado Hard Money Loan: Contact COHI, LLC
COHI, LLC is a premier private equity lender in Colorado. For more than a decade, we have been funding short-term real estate loans for commercial and residential properties across the state. Our hard money loans are available for commercial properties, investment properties, secondary residential properties, and land loans.
Disclaimer: We do not make consumer loans or loans primarily for personal, family, or household use.
With a streamlined application process and responses within one business day, COHI is the lender you can trust for fast, flexible, efficient lending solutions, backed by honesty, transparency, and fair pricing. Plus, from the initial application through the final decision, you will always deal directly with the lender making the decision, not a broker.
From offices based in Denver, CO, COHI funds Colorado real estate loans, from $50,000 up to $3,000,000, for properties throughout the Denver metro area, the Front Range, the I-70 Corridor, and beyond.
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