A hard money lender (HML) is an individual or company that offers a specified type of collateral backed loan. Usually lending short-term capital credits, these credits offer funding and/or cash based on the value of the collateral. The security for the loan can be almost any item – cars, boats, airplanes, property, paintings, hard assets, etc. Hard money lenders pay more attention to the value of the item than to the borrower’s ability to repay. This practice is different from standard loaning institutions which require a FICA score, debt to income balance, and other parameters.
Rates and Fees
HMLs have a variety of different rates, fees, and terms that you should become familiar with. They are more expensive than traditional advances because they are not based upon customary credit guidelines, which guard investors and banks from high default rates. Therefore, rates and fees are typically much higher than predictable mortgages, usually ranging between 8 and 15 percent, depending on the advance amount and duration. Also, there is usually a fee to process the loan, ranging between 3 and 10 percent, which is known as paying “points.” Actual rates may differ from state to state based on your state’s usury laws.
Even though you do not have to go through the process of all the typical paperwork that goes with a regular mortgage, federal law requires all HMLs to verify the borrower’s “ability to repay” per the Dodd-Frank Act of 2010 on all residential property advances. This documentation may not be as stringent as the conventional documents required, and the lender may look at the paperwork differently, but borrowers will still have to provide a tax return and bank statements.
Duration of the Loan
The time limit for this short-term agreement is approximately 6 to 24 months.
Why Use an HML?
The private companies and individuals who make these short-term finances typically do so to fund real estate deals. Also known as “Private Money Loans,” these allowances can be a major source of funding for real estate buyers needing capital on a short-term basis. One of the things to consider is how quickly funds can be made available. Often, when you find a good investment property, you’ll need to move swiftly. Your ability to get access to capital quickly can make all the difference in a deal. Soft money or conventional advances take 30 days or more, and sometimes that is too long. Hard money is great for beginning investors who may not have the capital or for those who have a bad credit rating. This agreement is also a creative way to buy property and make a profit. You buy the property, fix it up, and sell it at market value price.
How do you find a hard money lender? There are hundreds waiting to lend. It could be someone you already know. Many of them probably advertise in your area.