Hard Money Loans Explained:
The Ultimate Guide to Understanding Hard Money

When was the last time that you considered a hard money loan? Also known as a private money loanthese loans are secured against real pieces of property, owned and paid for by the recipient. Typically, hard money loans are considered a last resort for borrowers due to the poor reputation that they have accrued.

Hard money loans are viable financial solutions for individuals who need them. Despite a few bad stories surrounding shady lenders, there are reasons to consider the hard money lending industry when you need to shore your finances. While the stigma surrounding private money loans may still remain, we are about to show you how effective they can be when used correctly.

  • Definition of a Hard Money Loan:  Asset-based loan financing which requires a borrower to receive funds that have been secured by a property. Typically secured through a private investor or business.

In today’s conversation, we aim to cover the basics of hard money loans. Our goal today will be to teach you at least a few of the following concepts so that you can make positive financial decisions for yourself and your loved ones. Today’s article will seek to clarify the following:

What is a Hard Money Loan?

When we discuss the terms of a hard money loan, we are actually discussing a short-term loan that has been secured by a piece of real estate. Typically funded by private investors, hard money loans aren’t going to be found in conventional lending spheres such as a credit union or a bank.

The average hard money loan has terms equating to roughly 12 months, though loan terms can be extended into the realm of five years with the proper lender. In order to stay current on the hard money loan, recipients are required to continue monthly payments of interest or interest + principal with a balloon deposit to end the term.

When it comes time to select a hard money loan, finding beneficial terms, as well as the appropriate loan amount, will be based on the value of the property being staked as collateral. What does this mean exactly? Well, the value of your loan will be based upon the property value of your collateral rather than your credit score.

In case you default, it is important to understand that your hard money lender has the option to foreclose on your collateral. Many shady lenders try to take advantage of borrowers, including major corporations. With that being said, there are hard money lenders with great reputations that are shifting the stigma surrounding hard money loans. Working with these professionals can ensure access to the convenient cash that you need to continue purchasing and flipping property.

Key Takeaways: Hard money loans are not going to be based upon your credit score. Offered by private investors, hard money loans can be a great way for credit-challenged individuals to gain access to the loans that they need to succeed in their financial endeavors.

When to Consider a Hard Money Loan

There are going to be many different situations in which you can consider a hard money loan. Borrowers can pursue hard money loans when pursuing a host of different potential purchases including:

man looking at hard money loan

Industrial Property

As you begin to dive into the research surrounding pursuing your hard money loan, you will have to begin working with a host of potential lenders. As you pursue hard money lenders, you’ll come to realize that some may specialize in one aspect of property ownership rather than another. For example, some hard money lenders won’t lend against owner-occupied residential properties. The reason for this is that there are significantly more rules and regulations due to Dodd-Frank.

Pros & Cons of a Hard Money Loan

When you need to avoid the traditional mortgage lending process, pursuing hard money can be the best scenario to guarantee your success. As a quick-and-convenient way to acquire a loan, there is a range of pros and cons that must be understood about the process.

Let’s explore the pros and cons of hard money lending together below.

Pros

  • Fast – Hard money loans are quick and convenient thanks to the relatively low bar of clearance that they possess. With little more than the collateral required for your loan, you can work with a private lender to quickly assess your paperwork and process your transaction. As soon as you’ve struck up a relationship with a lender, you can quickly move to close your deal.
  • Flexible – When compared to a traditional loan agreement, a hard money loan can be considered more flexible. Lenders will not require you to undergo a standardized underwriting agreement, instead allowing you to evaluate each aspect of your loan individually. Some private lenders may be flexible with repayment dates and so on.
  • Strong Approval Odds – Individuals pursuing hard money loans are likely doing so because of their high chances of approval. If you are investing in property, your lender will lend as much as that property is worth. Throughout this process, you will be less impacted by potential marks on your credit report, though this is a discussion to be had with each individual lender.

Cons

  • Must Have Secured Collateral – In order to secure a hard money loan in the amount that you need, you must have secured collateral that can account for your needs.
  • Not A Traditional Process For Some – Hard money lenders are not quite as common as loans found through traditional banking institutions. As a result, there is still some residual stigma surrounding the industry. This can make it hard to find a reliable and professional hard money lender in Arizona. For that reason, we prioritize working with lenders that work with you.
  • Higher Interest Rates – All good things have negatives and high-interest rates are definitely part of the conversation. Higher interest rates are part and parcel of the hard money experience, with some interest rates hitting double digits on hard money loans. This is a reflection of the higher risk that lenders have to take when offering money outside of conventional financial processes.

Ultimately, finding a secured hard money loan will require an analysis of your financial situation as well as your requested lending timeline. For individuals looking to quickly purchase, repair, and flip property, hard money loans can be incredibly advantageous due to their speed and low-credit threshold.

Hard Money Loans and Value Ratios

By this point in time, you should be well aware of the various benefits and negatives surrounding hard money loans. We understand that they are fast and convenient financial resources and we also know that they require collateral. When working with a private investor on your hard money loan, you will probably want to know how much you can acquire.

In order to accomplish this, we must take a look at the loan to value (LTV) ratio of a hard money loan.

  • Loan to Value Ratios – The Loan-To-Value ratio refers to how lenders express the loan value against the total value of the asset acquired. You will also find this term used in other sects of the financial field, including in banking and real estate. Most commonly, you will find that lower loan to value ratios are used, typically within 60% to 70% of the property’s value.

Loan to value ratios are not based upon the credit of the recipient and that can make them hugely beneficial to individuals looking to rehabilitate their finances. While hard money loans are often riskier for lenders, the right partnership can be beneficial to both parties.

There can be a slight variation on Loan to Value Ratios depending on which lender it is that you work with. Some lenders will instead focus on the After Repair Value (ARV) which is focused on the value of the property after the borrower has improved the property. While this can create a riskier loan for the lender, it is incredibly beneficial to the recipient as it puts more money into their pockets.

Selecting a Hard Money Loan: Requirements, Tips, & Tricks

Working with a hard money lender requires not only education, but also discipline. In order to make the most out of your experience pursuing an LTV, you will want to be aware of a few tips and tricks to make the process easier.

If you are looking to rehab and flip property, you might want to consider the following tips and tricks when pursuing your LTV in Arizona.

  • Find A Reliable Lender – In order to have confidence when closing the terms of your hard money loan, you will want to find a reliable and professional company. 5-star businesses like Hanson Capital offer experienced lending assistance to individuals in need. With 24/7 support backed by industry veterans with over 30 years of experience, it is easy to see how a reliable lender at Hanson Capital can make the process easier.
  • Clear and Open Communication – When it comes time to find your hard money lender, you might find it beneficial to work with someone locally. Real estate brokers and mortgage brokers can often point individuals toward a hard money lender. Upon meeting your lender for the first time, prioritize clear and open communication. Hard money lenders want to know every aspect of your situation so as to better serve you the proper financial benefits.
  • Determine Your Needs – Before you walk through the front doors of a hard money lending business, have somewhat of an idea as to your needs. You can find loan types available in a variety of fields for hard money financing including commercial properties, foreclosure rescues, and even financing for investing.
  • Be Aware of Your LTV – When pursuing a hard money loan, traditional hard money lenders will use the ‘if sold today’ value of your collateral to value your loan. What does this mean? It means that your appraisal will be more conservative than a regular banking institution. This is due to the naturally higher risks of a hard money loan as perceived by the lending associates.
  • Have a Plan Ready – One of the biggest components of a successful hard money loan is your ability to communicate your plan. As the borrower, you must have a reasonable plan that can show how you intend to pay off your hard money loan. Typically, hard money loans are used by real estate flipping professionals, so the process is relatively easy to forecast. How much do you plan on selling your property for after you renovate it? That’s the question to ask.

Like all the financial decisions we make in life, choosing a hard money loan can be contextual to your specific needs and situation. There are clear and present benefits to pursuing hard money loans particularly when applicants have lower credit scores or other potential remarks preventing them from accessing conventional loans.

With a proper understanding of the pros, cons, and process of borrowing hard money, you can now pursue the loan you need to accomplish your financial venture.

In Summary

Ultimately, the decision to pursue a hard money loan must be weighed against your needs and financial goals. While it is true that higher interest rates can impact the appearance of the numbers, the benefits that come along with a hard money loan are hard to look past.

In order to get started on your hard money loan journey, make sure to reach out to a professional private investor near you. Companies like Hard Money Lenders Arizona can provide quick, convenient, and 24/7 access to the funding support that you need. With effective communication, fast funding, and reliable industry vets, Arizona locals can enjoy access to the hard money lending that they need with just a phone call.