Hard money lenders are non-bank, asset-based lenders. Although both banks and hard money lenders make mortgage loans, hard money lender requirements and lending criteria often varies significantly from a traditional bank. Hard money lenders put much more emphasis on the underlying property, and less emphasis on the borrower. The underwriting process is significantly shorter with a hard money lender, and a loan can often be funded within a week (as opposed to 2-3 months or longer with a traditional bank). As such, real estate investors that buy foreclosures at auctions will often use a hard money lender to fund the purchase because the terms of the auction require an expedited closing process. Also, hard money lenders fund loans on properties that a traditional bank won’t fund — an example is a property that doesn’t have a Certificate of Occupancy (CO).

Hard money lending is a great choice for somebody who has poor credit or is rebuilding their credit; a low FICO score will not prevent you from getting a hard money loan. Finally, hard money lenders can also provide loans to refinance existing lenders or as way to cash out on a property.

It’s important to note that hard money lenders only lend on investment real estate, and do not make mortgages for residential purposes. You cannot live in a property that has a mortgage from a hard money lender.

Because a hard money loan is considered a commercial loan, a hard money lender will not lend to individuals, and will only lend to LLCs. But don’t worry if you don’t have an LLC, they are very easy to create and can have only one member (you).

Hard money lenders analyze both the purchase price as well as ARV to make sure they can get paid back on loans they make. A property that is bought below or at market is an important aspect in obtaining a loan. If borrower is also taking out a loan for rehab purposes, a hard money lender will want to make sure that the repairs are being done according the repair schedule and on time. A clean title is also essential when obtaining a hard money loan. Any judgements or liens on the property or LLC that is taking out the loan (remember, the loan must be made to an LLC), will have to be cleared prior to the loan being disbursed.

It’s important to a hard money lender that their borrower is entering into an investment or transaction that will be profitable for the borrower. In other words, the hard money lender wants you to make money on your real estate investment, so that they can get paid back on their loan. The lender will ensure that there is enough “spread” in the deal, which means that the ARV will cover the purchase price, rehab costs, interest on the loan, closing costs, and any other associated fees with sufficient room left over to make the investment profitable for their client.

• To cover the purchase and rehab costs of a property that a traditional lender won’t finance, either due to the condition of the property or the borrower’s credit. Once the property is repaired, it’s typically sold to a retail buyer in what’s known as a “fix and flip.”
• To purchase and renovate a rental property that a bank won’t fund. After the rehab, the property can be rented out and considered “stabilized,” making it eligible for a traditional refinance at a lower rate.
• To fund purchases with tight deadlines that a traditional lender can’t meet, such as foreclosure auctions. Direct hard money lenders can often close in under a week, while banks can take months.
• To pull fast equity from a property already owned, using it as collateral in a cash-out refinance.
• To quickly refinance another mortgage that’s about to mature, avoiding default or penalties.
• To buy property in the name of an LLC. Since traditional lenders often don’t lend to LLCs, direct hard money lenders can be a more flexible option for structuring ownership outside your personal name.