Hard money loans most commonly use real estate as collateral, but other hard assets — like vehicles, equipment, machinery and precious metals — could also secure the loan. The typical terms for hard money loans range from six to 24 months.
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.
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.
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.
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%.)
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.
Income Considerations
Hard money loans aren't based on the borrower's income, but the lender still needs proof that the borrower has the means to repay the loan. Typically, a borrower's income is verified by reviewing bank statements, tax returns, or pay stubs.
Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property.
These types of loans are commonly known for their short duration, usually between six and eighteen months, although they can be as long as three to five years. The most common use of hard money loans today involves real estate investments such as residential fix and flip projects.
Non-Transferable Assets: Assets that are legally restricted from being transferred, such as government benefits, social security payments, or certain insurance policies, cannot be used as collateral since they cannot be seized or sold.
Hard Money Loan eligibility
In some cases, hard money lenders require inexperienced investors to have a credit score of at least 620, as well as additional collateral, such as your home or another valuable asset.
However, if you default on the hard money loan, the lender can take the property and sell it while the accumulated fund will be used to pay off the outstanding loan.
This type of funding is considered more flexible than what banks or other traditional lenders offer. Because hard money loans require borrowers to use their assets as collateral, private lenders are often more willing to work with borrowers with bad credit or more modest cash reserves.
It's almost impossible to get a loan that will finance 100% of your real estate purchase. The vast majority of lenders will require a down payment and hard money loans are no exception. In fact, hard money lenders usually require sizable down payments. Most hard money lenders require a down payment between 30% to 50% .
2. Flexible lending criteria leave hard money lenders exposed to more risk than traditional lenders. While hard money lenders aren't bound to traditional lending criteria for borrowers, this increases their risk because they have to form their own criteria and take each borrower on a case-by-case basis.
If an appraisal inspection uncovers a major issue, like a bad foundation, the loan may be denied as the home would be seen as a bad investment.
While hard money loans are not cash, they are often considered cash equivalent because they differ from traditional loans. A bank will provide you with a mortgage based on the market value of the acquired property (i.e., the purchase price).
For example, in California, you can get your license from California's Department of Real Estate; however, you must have a broker's license and additional licensing to become a lender for hard money loans.
Get $500 to $5.5 million to fund your business
Loans guaranteed by SBA range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital.
Like credit, the ability for the borrower to make the payment is an important factor when obtaining an approval for a hard money loan. Most hard money lenders will not require tax returns, w-2's, or other income verification documents, however, they will want to understand how the borrower intends to make the payment.