Hard Facts About Hard Money
What is “hard money?” Who (and where) are hard money lenders? Is this kind of lending helpful, enabling, or downright parasitic? Usury with a macho label?
With real estate investors, money is considered either “soft” or “hard.”
- Soft money is readily available, easy to qualify for, with flexible terms and predictable processes.
- Hard money, on the other hand, has stricter, “take it or leave it” terms. Procedures for qualifying and closing a hard money loan are generally less time consuming.
Most hard money comes from cash-rich individuals, not a traditional mortgage company or bank, which is why it’s often referred to as “private money.” As such, the first priority of hard money lenders is to protect their investment capital. It used to be that hard money lenders would lend solely based on the property being financed, lending only up to a certain percentage of the fair market value of the property, so that in the event of default, the hard money lender would profit handsomely if they had to foreclose or resell to a new buyer. Today, many hard money lenders require more than just equity to qualify – expecting you to fill out a credit application, provide tax returns, recent pay stubs, and bank statements. Again, it all depends on whom you deal with.
Loan to Value Ratio – Typically, hard money lenders will only loan you up to 70% ARV (after repaired value).
Interest rates for hard money loans are significantly higher than soft money, varying from 12% — 20% annually, based on the borrower’s credit score and real estate investment experience. Like other real estate loans, there are closing costs, including origination fees from 2 to 10 points.
Pre-payment Penalties – Be aware of pre-payment penalties, and try to avoid them.
Processing Time – Your ability to access money and close quickly can make all the difference.
Hard money is ideal for beginning investors, or those with bad credit. Investors also use hard money when they need to purchase quickly. There are hundreds of hard money lenders waiting to lend you money. The best way to find one is to talk to a mortgage company, title company, or real estate agency. Shop around until you find one that fits your needs.