A hard money loan is a type of loan typically used in real estate transactions. Here are the key characteristics and aspects of hard money loans:
- Asset-Based Lending: The most distinguishing feature of a hard money loan is that a real property asset secures it. If the borrower defaults on the loan, the lender can seize the property to recoup their investment.
- Short-Term Loans: Hard money loans are usually short-term, ranging from one to five years. This contrasts traditional mortgages, which often have longer terms of up to 30 years.
- Quick Approval and Funding: One of the significant advantages of hard money loans is the speed of approval and funding. Unlike traditional loans that take months, these loans can often be approved and funded within days or weeks.
- Higher Interest Rates and Fees: Due to the higher risk associated with these loans (from the lender’s perspective), hard money loans generally come with higher interest rates and fees than traditional bank loans.
- Used in Various Real Estate Transactions: While often associated with house flipping, hard money loans are also used for other types of real estate transactions, such as land loans, construction loans, and when a borrower needs to act quickly on a property purchase but doesn’t have the time to go through a conventional bank loan process.
- Investor-Focused: Real estate investors typically use hard money loans rather than homeowners. This is partly due to their higher cost and shorter duration, which might not be ideal for long-term residential homeowners.
- Issued by Private Lenders or Companies: Unlike traditional loans usually issued by banks or credit unions, hard money loans are typically offered by private investors or companies specializing in this type of lending.
- Loan-to-Value (LTV) Ratios: Lenders will evaluate the loan amount based on the property’s value (post-renovation value in some cases). The loan-to-value ratios in hard money loans are generally lower than traditional loans, meaning borrowers may need to bring a significant down payment or equity stake.
- Flexible Terms: Since these loans are from private lenders, there’s often room for negotiation on the loan’s terms, interest rates, and fees.