The Not So Scary Consumer Guide to Hard Money Lending

Nov 23, 2021 | Blog

Entering the world of real estate investing can be a financially beneficial project to take on, whether you’re buying your own single-family home, looking for a fixer upper, or working with multiple properties. When you’re just starting out with this business venture, it can be difficult to navigate the paperwork and red tape of it all. Qualifying for financing isn’t always easy through traditional lenders or banks, especially if you’re self-employed, a house flipper, or in another unique position. That’s where hard money lending comes in, so that you can get your property financed and move toward achieving your real estate goals. A hard money loan can provide the flexibility and common sense you need. We’ll discuss why a hard money loan might be right for you, what is required of the loan, and the benefits of a hard money loan compared to a conventional one. Though the term “hard money” might sound intimidating, here is our not-so-scary consumer guide to hard money lending.

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Why is it called “hard money” or “private money”?

A hard money loan is a short term loan secured by real estate and based on the value of the borrower’s collateral. They are sometimes referred to as a private loan, or even a rehab loan since they are popular with house flippers who are rehabbing homes for a profit. They’re funded by private investors instead of a bank or traditional lender.

They’re called “hard” money because they are secured by real estate and may sometimes have slightly higher average interest rates to account for risks and shorter terms. This makes a hard money loan quite different from a conventional loan.

The amount that hard money loan lenders are able to loan depends on the value of the property being used as collateral. This means that if a borrower is unable to pay back their loan and meet its terms, then the property they put up as collateral is then forfeited to the hard money lender. For this reason, the lender is generally more concerned with the property’s value than the borrowers credit score.

This makes it easier for applicants who have had a foreclosure or short sale to obtain a loan that a traditional lender would deny. Because of the circumstances that a hard money loan is typically used for, the loan terms can range anywhere from three to 36 months depending on the lender’s rules.

What are the benefits of a hard money loan?

The benefit of a hard money loan is that the lender will typically care more about the value of the collateral being used than the borrower’s credit history. This makes it easier for those who have non-traditional financing, have had a foreclosure, or other unique circumstances to obtain a loan when a traditional lender might turn them down.

Another benefit is the short approval time. Since hard money loans are based on assets, there is less concern with the borrower meeting the underwriting requirements for a loan. This leads to less back and forth between the borrower and lender, meaning that they can get approved quickly.

Most lenders of hard money loans require no verification of income, like a conventional lender would. The borrower’s credit score is less important to a hard money lender and they likely won’t need to look at factors like debt-to-income ratio, tax filings, or previous years’ income.

There is also potentially more flexibility with a down payment in a hard money loan. Almost all hard money lenders will require some amount of a down payment, but the amount can vary based on your relationship and track record with the lender.

How are hard money lenders different from a bank?

Hard money lenders do not always require the same information as a traditional bank lender would. Hard money lenders will likely not ask for things like income verification or previous year’s tax filings. This makes a hard money loan ideal for borrowers who may not be able to obtain a conventional loan because of their credit history, self-employment, income history, or even delinquencies from their past.

It’s also a good idea to establish a relationship with your hard money lender. Once you establish a good track record with them, they’re more likely to work with you in the future. It’s primarily up to the borrower and the lender to agree on terms of the loan, whereas a bank would set all the terms with a conventional loan.

What is required for a hard money loan?

Once the borrower finds property that they would like to purchase, they must find a broker or a hard money lender and complete a business loan application.

The steps for getting a hard money loan could look similar to this:

The borrower submits information about the property they wish to purchase.
The lender and borrower meet to discuss plans for the property and discuss details of the loan.

Typically, the borrower will then present how they plan to pay the loan back which usually means to improve the property, sell it, rent it, or refinance their loan to a conventional one.

Where can I get a hard money loan?

Real estate and mortgage brokers and other real estate investors may be able to point you in the direction of a hard money lender.

Whether you’re self-employed, a real estate investor, a house flipper, or in another unique position that makes it difficult to qualify through traditional means, a hard money loan can provide the flexibility and common sense you need to achieve your goals.

Avantgarde Lending is a hard money, or private money lender, that serves California borrowers.

We offer owner-occupied or non-owner-occupied consumer or business purpose loans for the following needs, when the deal makes sense:

  1. Single-family and multi-family homes
  2. Fix-and-flip or fix-and-occupy loans
  3. Commercial, industrial, construction, and land loans
  4. Purchase money, rate and term refinance, and cash-out refinance loans

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