What is a Hard Money Lender?
Real estate investors find money to finance their projects from a variety of sources. Some investors use their own capital, but the majority will try to borrow money from a lender in order to fund their deals. The lender might be a friend or family member, a private lender, or a bank. Among the various types of lenders, hard money lenders fill a niche for those who need a private lender that is faster and easier to qualify with than traditional banks.
Hard money loans gain their namesake through their collateralization. These loans are backed by the “hard” asset, usually the property being purchased, in lieu of the borrower’s financial and credit history. As such, hard money lenders will use the purchase price, any estimated repairs, and the after-repair value, or ARV, to help determine the appropriate loan size.
How do you obtain a hard money loan?
Qualifying for a hard money loan is typically easier than qualifying for a traditional loan from a bank. A bank will normally look for enough income that can be proven over time, a good credit score, and all of a borrower’s recent residential history. This process can be time consuming, and investors typically need to move quickly.
In contrast, hard money lenders will only need items such as the purchase contract (if the property in question is being purchased), the rehab budget, proof of your tax returns, and proof of identity (e.g. a driver’s license or passport). Additionally, if you’re operating under an entity, the hard money lender will require the legal formation documents and operating agreement. Proof of income isn’t necessary to the transaction, and credit score requirements are significantly lower as well.
Pros and Cons of Hard Money
Now that we know what is required for a hard money loan, what are the benefits of getting one? What are the drawbacks?
As noted above, hard money loans are preferred by a majority of investors for the following reasons:
- Speed of approval and closing
- Lower credit requirements
- Limited financial history needed
- Easier underwriting process than conventional loans
While the benefits of hard money often outweigh the potential detriments, it’s worth taking note of potential negatives for those who aren’t sure if hard money is right for them. Possible negatives include:
- Higher rates than conventional loans (Bay Mountain Capital offers rates as low as 9.9% for fix-and-flips)
- Shorter loan terms (Bay Mountain Capital offers 6-12 month terms depending on qualifications for fix-and-flips)
- Investors will typically need to bring more cash to closing for hard money loans as they need to have more skin in the game
Why Use a Hard Money Lender?
Hard money lenders are able to facilitate the approval process by cutting out requirements employed by traditional institution. Most will also be able to work with borrowers in a more flexible manner than conventional banks. Whether you’re just starting your first flip or have been flipping for years, agility is required to be successful.
If you’re looking for a hard money loan, consider Bay Mountain Capital as your lender. Since 2008, we’ve been operating as the premier hard money lender in DFW and have expanded to Tennessee, Georgia, Oklahoma, and Alabama (with more regions being added each year!) We treat our borrowers as our partners, and your success is our #1 priority. For more information on how we can help you with your investing goals, check out our terms and apply today.