Hard Money Loans and How They Work
Hard money loans, sometimes referred to as private money, fall under thee category of asset-based financing. The amount of the hard money loan granted is dependent on the collateral offered that is backing the loan. These types of loans are non-traditional loans and vary from bank loans in a few ways.
Hard money as short-term financing
They are usually a form of short-term financing while an individual or business is in transition between long-term financing options or needs quick funding. Because they “bridge the gap” between long-term financing, hard money loans can be used as bridge loans. The term of private money loans can last for a few months or be extended to as much as five years.
The reason hard money loans are typically used as a short-term financing option is because of the nature of the loan. The loan usually carries a higher, although not unreasonable, interest rate than a traditional bank loan. Borrowers will attempt to pay off the higher interest rate loan and move toward a traditional loan with lower interest.
Loan requirements and specifics
Hard money loans carry a higher interest rate because private companies or individuals fund them. These lenders will grant loans in a much quicker timeframe because they require less documents and forms than a bank loan. Private money loans can be funded within a week, while a bank loan can take up to a month to become funded. Private lenders are much less concerned about a borrower’s credit score and more focused on the value of collateral or property offered up for the loan. The amount of the loan is determined by the loan-to-value (LTV) ratio. Lenders will typically lend 65 to 75 percent of the value of the property offered as collateral. Borrowers can use residential, commercial or even industrial property to back their loans.
These loans are attractive during a time of strict requirements for traditional bank loans. Private and individual lenders are usually less strict about the loan terms as well and may make adjustments to the loan structure to better accommodate both parties.
When are hard loans used?
There can be many uses for hard money, but this type of funding is popular in real estate. The fast and quick option of a private loan gives investors a convenient way to get money and purchase a property they are interested in while competing with other bids.
Take the time to research hard money loans and find out if the option is right for your business endeavors.