Hard money is a form of lending that a lot of people have heard about, but few fully understand. It goes without saying that hard money is quite a bit different from traditional lending. It is different in the way it’s regulated and practiced. It is different in terms of who benefits from it.
If you have always wanted to better understand hard money lending, this post is for you. It will not get into a tremendous amount of detail, but it will explain the most important aspects by way of six characteristics that make hard money loans different. Here they are:
1. Private Lending
The basis for hard money being different is the fact that it is structured as private lending. Hard money lenders are not banks or credit unions. They are not financial institutions regulated by federal and state banking laws. This doesn’t mean they are completely unregulated. It does mean that they are regulated differently.
2. Loan Purpose
Loan purpose is the next key characteristic. Theoretically, hard money loans could go toward funding just about anything. But practically speaking, the loans almost always fund real estate transactions. That’s just the nature of the industry.
Actium Partners is a Salt Lake City, UT hard money firm that specializes in commercial property investments. They help investors obtain properties like office buildings, strip malls, and multi-unit apartment complexes. They do not fund individual residential properties. However, there are plenty of hard money firms that specialize in residential rentals and flips.
3. Short Terms
Another key characteristic of hard money is the short-term nature of a typical loan. Where banks and credit unions might offer loans with terms ranging from 15 to 30 years, hard money lenders work on much shorter terms. How short? Terms of 6 to 24 months are the norm. A term of 3 years is almost unheard of.
Hard money lenders prefer shorter terms because the loans they make are riskier. An ideal scenario would have a lender getting in and out of a project in just 6 months. Terms of 12, 18, and 24 months are available when circumstances warrant.
4. Higher Interest Rates
Along with shorter terms are higher interest rates. Hard money lenders can offer rates several percentage points higher than what banks and credit unions offer. Higher rates are one tool for managing risk. Fortunately, the shorter terms offset higher interest rates to some degree. But there are also higher fees as well.
5. Lending Criteria
Being private lenders, hard money lenders aren’t required by law to verify a borrower’s creditworthiness and ability to repay prior to approval. Most do not bother. Rather, they rely on the value of the property being acquired as collateral for the loan. As long as the value is there, a lender can find its way toward approval.
This is why hard money is often misunderstood as a form of funding for people with bad credit. Lenders don’t worry themselves about credit because they are more interested in asset value. But that doesn’t mean their products are specifically tailored to borrowers with poor credit ratings.
6. Funding Speed
Rounding out the list of key characteristics is speed. Hard money lending has fewer documentation requirements and a more streamlined approval process. Loans can be approved in a matter of days rather than months. Real estate investors appreciate the speed due to the highly competitive nature of their business.
It goes without saying that hard money is quite a bit different than traditional financing. It amounts to a valuable service that real estate investors appreciate.
