Top 15 hard money questions & answers

I like to joke if you ask 10 people what is hard money you’ll get 15 answers.  Hard money is widely misunderstood in the industry.  As a private/hard money lender, below are the top questions and answers I get regarding hard money.  It is important for borrowers/ brokers to understand hard money lending and its importance in the capital structure for real estate financing.  Hard Money is an important financing tool for many borrowers.

  1. What is a hard money loan?

The definition of “hard money” when referred to in real estate financing, is essentially a loan secured by an asset as opposed to the borrowers financials, credit, etc…. The name hard money is frequently interchanged with  “no-doc” , private loans, bridge loans, private money loans, etc…

For a hard money loan, the underwriting decisions are based on the borrower’s hard assets (real estate). A first mortgage is used as collateral for the loans on either a residential or commercial property. There are other types of hard money loans on inventory, equipment, etc… but since we focus on real estate, we will not go into these variations here. Since the lender is not relying on borrowers credit, etc… the asset is evaluated to ensure there is ample collateral to secure the loan.

Hard money loans typically close relatively quickly (for us typically in under 5-10 days) without the headaches or time required of a conventional loan. Fairview Lending is a hard money lender focusing on first mortgages on residential investment properties (GA, CO, FL) and commercial properties (GA, CO, FL, IL)

  1. How do hard money loans work?

A hard money lender places a first mortgage on the commercial or investment residential real estate.  A hard money lender gets title insurance and there is a closing where loan docs are signed just like a traditional loan.

 

  1. What is the difference between a hard money loan and a traditional bank loan?

Traditional loans from banking institutions rely heavily on borrowers income, credit, tax returns, etc.. as opposed to hard money’s primary reliance on the hard real estate asset. Along with requiring substantially more documentation, conventional lenders …..

Along with requiring substantially more documentation, conventional lenders ….. have minimum credit scores (typically mid 600 Fico and above) as opposed to hard money loans that are underwriting on the collateral as opposed to the borrowers credit (Fairview Lending has closed loans with FICO scores in the low 400s). All our underwriting is done in house so we don’t require an appraisal or extensive documentation which enables us to close transactions quickly with no upfront costs to the borrower.

loans on conventional commercial loans can take months to close, hard money commercial loans close much quicker with Fairview we try to close in 5-10 days.  Residential bank loans typically take around 45-60 days while we can close in as little as 5 days. The final important differentiator between hard money and conventional financing is the interest rate. Since there is more risk in a true collateral based loan, the interest rates are higher than a conventional mortgage.

  1. What is a soft loan vs a hard loan?

A soft loan is a loan through a traditional lending source like a bank, credit union, life insurance company, etc… . This is also known as soft financing. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays. A hard loan is an “asset secured” loan that is given by a private fund or investor.  This is not a bank loan.

  1. Are hard money loans a good idea?

A Hard Money loan is a good idea depending on your circumstances and objectives.  The primary reason borrowers get a hard money loan is because they need cash quickly.  A hard money loan is typically cheaper than other options for quick cash like credit cards or factoring (for a small business that has receivables, inventory, etc…).  The borrower needs to weigh the cost of a hard money loan vs. their needs for a quick funding.

 

  1. What is “hard debt”

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies.

  1. Do Hard money lenders check credit?

Yes, a hard money lender pulls credit.  On of the primary reasons is to confirm identity and see if there is anything on the borrower’s credit that could impact the loan like a tax lien or judgement.  At Fairview, my primary focus is not the credit score as we are focusing primarily on the property.

  1. Can you refinance a hard money loan?

Yes, some hard money lenders might have prepayment penalties that you need to be aware of.  This should be spelled out clearly in the loan commitment as well as the loan documents/mortgage.

  1. Is a hard money loan considered cash?

Due to the speed of closing (5-10 days) most hard money loans are considered comparable to a cash transaction.

  1. Can you get a hard money loan on a listed property?

Yes, if a property is listed for sale a hard money lender can provide a loan.  Note, traditional lenders cannot lend on properties listed for sale this is where a hard money loan can help a borrower by providing a “bridge loan” between the sale of one property and the purchase of another one.

  1. How does a hard money loan work with bad credit?

Traditional lenders like banks and credit unions have rigid minimum credit score requirements.  A hard money loan is not a bank loan and therefore a private lender is able to lend on whatever credit they want.  At Fairview we don’t have a minimum credit score as we understand that a credit score is just one metric of success and shouldn’t “define” a borrower or transaction

  1. What is a hard money loan for real estate?

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies.

  1. Is hard money lending safe?

When selecting a hard money lender, you need to be careful.  Like any transaction if something sounds too good to be true it likely is.  Focus on a local lender and verify via the BBB, google reviews, and googling the company to ensure they are an honest lender.

  1. Are hard money loans interest only?

Typically, hard money loans are interest only as they are meant to be used for a short time period.  This allows the borrowers to have a lower payment than an amortizing loan to help them accomplish their objectives

  1. How do I apply for a hard money loan

Each hard money lender will have their own process.  For Fairview, we just need basic property information to get started.  We underwrite all our loans in house and can quickly tell you yes or no on a deal with a quick phone call or e-mail.

Have more questions?  Give us a call at 866.634.1270

See additional Frequently Asked Questions on Hard Money Lending

Specific hard money parameters by state