Should You Take a Hard Money Loan?

by on January 20, 2012

There may come a time in your life when you really need or want some money and traditional lenders have turned you down.  Maybe you’ve even thought about getting a quick loan from one of those local payday loan stores?  Well, if you have real estate, or are using the money to buy real estate, you may be able to get a hard money loan.  The question is, should you take one?  Here, we’ll discuss what a hard money loan is and in what circumstances you should consider using one.

What is a Hard Money Loan

A hard money loan is a loan that doesn’t come from a bank.  They are typically issued by private lenders or from private companies.  For example, when you drive around town and see all of the business signs that say something like ABC Capital, ABC Funding or ABC Financial Group; these could be hard money lenders. These types of loans are given to people that have real collateral, which in most cases Hard Money Loansmeans that you have actual real estate to collateralize the loan.  In many cases, hard money loans are provided to help people buy real estate that they cannot get financing for from a bank.

Hard money loans carry a much higher interest rate than traditional mortgages and commercial property loans.  They are also for much shorter durations.  While a residential or commercial property loan is often for periods between 15 and 30 years, most hard money loans are for a period of a few months up to a few years.  Whereas traditional loans are given by banks based on income, debt ratios, and credit scores; these types of loans are usually based almost solely on the value of the underlying asset.  A typical hard loan will be for as much as 60-70% of the value of the underlying asset, which is a much smaller percentage than traditional loans, which can reach as high as 90-100% of the property value.

Hard money lenders are willing to give loans without as strict of requirements as traditional lenders because the loans are more fully collateralized.  That’s because the low loan to value (LTV) ratio means that they are more likely to get their money back if loan payments are not made.  Also, these types of lenders are compensated with higher interest rates than traditional loans, which is also an incentive for these types of lenders.

When a Hard Money Loan Makes Sense

These types of loans can be very beneficial for both the lender and the individual getting the loan, but only in the right circumstances.  One should never take out a hard money loan on existing property unless they have a detailed plan on how to pay the money back.  As hard money loans have short durations, you must pay back all of the principal at once, so you won’t be able to spend the money from the loan on anything.  Instead, you’ll have to find a way to refinance the loan into a traditional loan at some point.  Here are some examples of how to use a hard money loan to your advantage.

Example 1.  You are Buying a Property That Needs Improvements

If you are buying a home that needs a lot of improvements and is deemed unliveable for some reason, a traditional lender will probably not give you a loan.  For example, I have a friend that bought a foreclosed home and the kitchen flooring was removed during a remodel.  Because the flooring was removed the banks considered the home unliveable and would not give a traditional loan for the house.  Unfortunately, you can’t touch the floor until you own the house, and you can’t own the house until you fix the floor.  For reasons like this, you could get a hard money loan, then buy the house and fix the floor.  After that, you should be able to qualify for a traditonal loan where you can refinance the property and then pay off the hard money.  In this example, a hard money loan is a great asset.

Example 2.  You Don’t Qualify for a Traditional Loan Because Your Debt Level

Another example would be for a real estate investor.  Often times, investors are turned down for loans on second and third properties because they have too much debt overall and not enough income to show for it.  In many cases, banks need to see years of positive cash flows from your property before they are willing to lend money to you.  If you need money to buy your next investment property and can’t get a loan for this reason, you could consider getting a hard money loan.  The idea would be that you get the loan, buy the property, and then improve the cash flow on the property during the course of the hard loan so that when the hard loan comes due, you can refinance into a traditional long term loan.  In cases like this, when you have multiple properties it often makes sense to refinance existing properties that have proven cash flows and then use that equity to help pay off the hard money lender.

In conclusion, you can see that hard money loans can make sense, but you must be very careful not to get stuck in a hard loan with no way to refinance and pay off the hard lender.  These loans are basically bridge loans that need to be paid off in a short time.  Never even consider a hard loan for personal spending or any other reason than using it for investment purposes.  Hard loans should only be used in circumstances in which you are almost certain that you will be able to pay back the loan in the specified period.  You must have a clear and detailed plan as to how you are going to use the loan to get your property in good enough shape to finance it with a traditional loan.

{ 17 comments… read them below or add one }

Lena March 19, 2012 at 1:55 am

If you are into real estate, then I think hard money loans is your best option, but you have to deal with high interest rates.

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Brandon May 10, 2012 at 7:50 am

You have done an outstanding job by posting such valuable information about loan regarding property. According to the real estate market fluctuation it is really tough decision for people for taking loan for property. I think people should read this information may be it is useful for them .Thanks for sharing it.

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Sonoma County Home Loans June 10, 2012 at 5:37 pm

If you can refinance out of that mortgage loan in a few years due to credit cleanup, etc. then yes a private money loan could be a nice solution to a difficult real estate challenge.

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)Richard Hughes June 29, 2012 at 10:14 am

These sorts of loans seem like a good option for those dealing in property investment, but they don’t really make good financial sense for anyone else.

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Hard Money Seattle July 27, 2012 at 2:58 pm

Hard money loans are especially important in the current banking environment. Even borrowers who have strong credit, financials and great properties are finding it difficult to get commercial loans.

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Tom September 18, 2012 at 5:48 am

Hard money loan is good, especially if you want to invest on real properties or assets that appreciate. Just check out the interest rates.
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Jim September 29, 2012 at 4:38 pm

Sometimes loan borrowers need urgent cash.They may choose payday loan for this purpose.It is a advantages loan system.Whether it doesn’t cost much interest to the borrowers.

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Kathryn Eduardo October 2, 2012 at 4:33 pm

The problem with hard loans is that they impose quite a hefty interest rate (like what ms. Lena said earlier). Add that to the fact that current economic trends are pretty restrictive on financing schemes of any kind (not just hard money loans).
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Student ben February 13, 2013 at 2:23 pm

Money lending can be at different ways like their requirements. Just always don’t late to make money transfers back on time! this is my advice

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payday loan in one hour May 13, 2013 at 1:54 am

Hey Chris,
Thanks for your post. You have given very relevant information regarding these hard money loans. In my opinion taking a hard money loan is better and easier option for borrowers. But they should understand that these loans carries very high interest rates and also for very short time duration.

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Arta August 6, 2013 at 3:50 am

My advice is to avoid from hard loan companies. why? because Banks and official loan companies have their rules and reputation where they will holded in frame, but you never know what will stay by this company till you have some troubles with money payback.. Life learning.
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Chuck Stone August 26, 2013 at 8:47 pm

Great tips on hard money loans, similar to payday loans but on a much larger scale. Just to make a point, even a 30 yr mortgage at 6% will yield more than double what the loan is for.
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A. Perrse September 10, 2013 at 5:40 am

If you are in need of a hard loan and been refused elsewhere, then a hard money loan can be the best answer, in the uk we aso have business loans which are a excellent alternative.

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Spencer November 7, 2013 at 4:59 pm

I think one of the best reasons to get a hard money loan would be to invest in real estate and that’s about it. With the amount of time the loan would last, it’s hardly useful for many other things.
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Andrew November 13, 2013 at 2:55 pm

Hi Chris,
Hard money loans can be great sometimes, but for many people, they are just loans that have a high interest rate. But if you play your cards right, I think that you can actually turn a profit from these hard money loans. Thanks for posting,
Andrew

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Francis December 19, 2013 at 12:44 am

I must say that you have a very sensible topic here, Chris. I usually go to my bank whenever my pocket cannot manage to finance whatever necessities I would have to get but certainly hard money helps me find a new way to finance my needs.

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Mike April 14, 2014 at 7:35 am

Sometimes hard money brings success, this is a law or a dogma that anybody who is seeking for a loans, he can apply only and get a loan in minutes. Private lenders provide cash, and banks as well.

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