What is a Hard Money Loan?
A hard money loan is a short-term financing solution utilized primarily for acquiring investment properties, which are then renovated and sold or rented out. This specialized form of asset-based lending caters to real estate investors and individuals seeking funding for non-owner-occupied properties.
Hard money loans can be applied to many categories of real estate, including apartments, single-family residences, multi-family dwellings, commercial structures, industrial facilities, and vacant land.
Given their short-term nature, hard money loans typically span one to three years, with potential extensions of up to six months or longer, depending on the circumstances.
When are Hard Money Loans Used?
Hard money loans are typically used in real estate transactions when traditional financing options are unavailable or impractical. Borrowers turn to hard money loans when they need quick access to capital or have less-than-ideal credit histories. Real estate investors and developers often use them to fund renovations, acquisitions, or time-sensitive opportunities.
These short-term, high-interest loans are commonly used for a variety of property types, including:
Specifically, hard money loans are used to fund:
- Fix and Flip Projects: Investors purchase distressed properties, renovate them, and then sell them at a profit
- Property Acquisitions: Buyers can use hard money loans to acquire investment properties quickly, especially when traditional financing is unavailable or too slow
- Construction and Development: Real estate developers can use hard money loans to finance the construction of new properties or developments
- Bridge Loans: Borrowers can bridge the gap between the purchase of a property and securing long-term financing
- Renovations and Rehabilitations: Funds can be used to renovate or rehabilitate properties to increase their value
- Commercial Real Estate: Hard money loans can be applied to various commercial real estate projects, such as retail centers, office buildings, and industrial properties
- Land Acquisition: Investors can secure hard money loans for purchasing vacant land, which they might later develop or hold for future investment
Can a Hard Money Loan Fund Rehab Costs?
Who Should Get a Hard Money Loan?
Example of a Hard Money Loan
How Does a Hard Money Loan Work?
Hard money loans work by lending on the asset, which is the value of the property or land. If for some reason a borrower cannot repay the loan, the real estate property (asset) can be taken back and sold. Because of this, hard money loans do not have requirements for a high credit score or income. While it might be preferred that fund borrowers have a 600+ FICO score, projects can still be funded if a score is below that range.
The way a hard money loan works is very different from a traditional lender. Traditional mortgage lenders require some type of proof that you can repay the loan over time, and that proof is in the form of a credit score and your income. For borrowers who have a good credit score and income, and a history of paying back loans, most borrowers will get approved if they meet these conditions. However, the application process for a traditional bank loan can take weeks or months. It can also be difficult for some individuals to become approved.
What is Needed for Hard Money Loans?
Below is what most hard money lenders will require. It’s important to note that one of the most significant advantages of a hard money loan is it does not require a high credit score.
- Down Payment to ensure “skin in the game”
- Property Appraisal
- Lender Title Insurance
- Insurance Policy for damage and liability
- Builder’s Risk Insurance for extensive rehab projects
The primary requirement for obtaining a hard money loan is meeting the down payment criteria, which serves as collateral. Down payment percentages can vary from 20% to 40%, depending on the property type, calculated based on the Loan-To-Value (LTV) ratio. For example, if a residential property costs $500,000 and an LTV ratio of 75% is offered, you would be responsible for a $125,000 down payment.
Hard Money Loan Interest Rates
The interest rates for a hard money loan will vary depending on the lender. At West Forest Capital, our interest rates start at 10% but may go up to 13% depending on the scenario.
What are the Benefits of Hard Money Loans?
The benefits of hard money loans include:
Rapid Transaction Speed: The application process for a hard money loan is significantly faster than that of traditional lenders, with most loans being funded within five to 12 days.
Terms Flexibility: Hard money loans are created for flexibility based on the loan scenario. As opposed to a bank which will not make a loan if it does not fit its underwriting metric, a hard money lender may still make the loan by compensating in another area. As an example, if a client needs “rescue capital” within three days and there is no time to order the typically required appraisal, the loan might still be funded at a higher rate and lower estimated LTV.
Maturity Flexibility: Extensions can be provided for up to 6 months or longer on a case-by-case basis.
Accessible Approval: Even with a low credit score or a history of foreclosure, you still might qualify for a hard money loan.
Transparent Process: If you use a reputable lender such as West Forest Capital, the funding process is transparent and straightforward, free from hidden costs. There should not be surprise fees at closing.
Responsive Communication: Your hard money lender should be easy to reach, and be quick with their communication and feedback. It should not feel like you are working with a bank and the associated “red tape” bureaucracy. Time is money!
Hard Money Loans with West Forest Capital
West Forest Capital provides funds to real estate investors and others looking to finance non-owner-occupied real estate. We fund property types that include apartments, single-family, multi-family, commercial, industrial, and mixed-use.
We provide loans for purchases or cash-outs, as the scenario requires. We also provide 100% of the rehab funds that the property may need. Speed is our motto, so most loans are closed 3-4 days after the appraisal is received. Already have an existing appraisal? We may be able to use it and fund you much faster! In fact, we’ve even previously closed a brand new loan in one day.
We lend in New Jersey, New York, Connecticut, Massachusetts, Rhode Island, New Hampshire, Georgia, and Florida.