Hard money loans are a form of short-term financing, with the loan term lasting between three and 36 months. Most hard money lenders can lend up to 65% to 75% of the property's current value at an interest rate of 10% to 18%.
Hard money loans typically have terms of around 6-24 months. However, they can be as short as three months or as long as 36 months.
Interest rates — The average interest rate on a hard money loan is about 11.25%, but it can range between 7.5% and 15%. (Loan Ranger Capital offers standard interest rates between 10.9% and 13.9%, and our Top Shelf program offers interest rates as low as 7.9%.)
Hard money lenders require a down payment, often one that's a higher percentage than a traditional mortgage — think 20 percent at minimum, or 30 percent or more. A conforming conventional loan can be had for just 3 percent down.
The lender may superficially check your credit or finances, but, in general, the process will be much less rigorous than with a traditional loan. The less stringent credit check allows borrowers to get their money in days instead of weeks or months.
Your lender may ask you to provide a down payment of 10% to 30% (or more) on your hard money loan. Generally, the stronger your credit and financial qualifications, the less of a down payment you'll need to provide. However, a larger down payment may help you access better rates and terms.
Avoid loans with APRs higher than 10% (if possible)
"That is, effectively, borrowing money at a lower rate than you're able to make on that money."
A hard money loan balloon payment is the total principal balance of the loan plus one monthly payment due in full at the end of the loan term, which is usually 6-24 months from the start of the loan.
Where a traditional loan can take weeks to obtain, hard money lenders can provide funding in a matter of days. Credit checks and some minimal review of your personal financial situation are almost always required. Appraisals, too, are almost always required.
Hard money loans are short-term loans backed by a collateral asset, typically some form of real estate. They are funded by a private investor rather than depositors at a banking institution. The private funding nature of the money provides lenders with more flexibility in deciding which loans to approve or deny.
Here's how a typical hard money loan works: The borrower wants to purchase a fixer-upper for $100,000. The estimate for renovation costs is $30,000, and it's projected the rehabbed property can be sold for $180,000. In this example, the hard money lender will lend 70% of the home's projected value after repairs.
There are two main ways that you can exit your hard money loan; selling your property and using a portion of the proceeds to pay off the loan, or refinancing into a new loan, and using the new loan to pay off the hard money loan.
Many borrowers rely on hard money lenders because they don't have the time to wait for a conventional bank to complete their underwriting. The real estate market is extremely competitive, and sellers are more likely to accept offers with shorter closing timeframes. Less hassle, less headache.
Typically, hard money lenders focus on the asset's value rather than the borrower's credit score. However, this doesn't mean these loans are invisible to credit bureaus.
There's no federal regulation on the maximum interest rate that your issuer can charge you, though each state has its own approach to limiting interest rates.
Which type of loan is the cheapest? Generally, secured loans are cheaper than unsecured loans because they have lower interest rates and more extended repayment periods. However, secured loans also require collateral, which means you risk losing your assets if you default.
Even people with good credit scores make mistakes, and a bank may charge a penalty APR on your credit card without placing a negative mark on your credit report. Penalty APRs typically increase credit card interest rates significantly due to a late, returned or missed payment.
The typical terms for hard money loans range from six to 24 months. In order to offer a fast closing time, hard money lenders typically don't look into your credit history.
Here are the common types of prepayment penalties you might encounter: Fixed Penalty: This is a flat fee or percentage applied if you repay your loan early, as is the case with Yieldi's 3% penalty if paid before 6 months. The penalty amount remains the same regardless of when within that period the loan is paid off.
Credit Criteria
Usually, a minimum credit score of 550 or higher is required to qualify for a hard money loan. However, some lenders may be more lenient and even provide financing to borrowers with a score as low as 500.
Hard money loan terms are usually short, typically lasting 1 – 3 years. This fast turnaround means lenders will profit quickly – either from interest on the loan or if you default on the loan. Let's take a look at how higher interest rates come into play with hard money loans.
Finally, hard money lenders do not make consumer loans, so to make sure the lender knows the loan is a business investment, you should set up the real estate under an LLC.