If you’re new to the world of real estate investing, the phrase “hard money loan” might sound a little intimidating. Many times, a hard money lender can be a real estate investor’s best friend– helping to make private money readily available for investment opportunities, at little or no risk to the investor.
What is a hard money loan?
Basically, a hard money loan is one that is issued at a much higher interest rate than a conventional residential or commercial mortgage. The real estate investor who uses a hard money loan to purchase a property actually saves money, because he doesn’t have to share as much of their hard-earned net profit with a money partner.
Another attractive feature of hard money loans is that they are asset-based– the collateral is the quick-sale value of the investment property itself. That means that even a real estate investor with no credit or bad credit can obtain a hard money loan from a private lender, with no personal guaranty required and no risk to his credit.
Hard money loans on non-owner-occupied (NOO) properties– the investment properties many real estate investors are looking to buy– can carry terms as short as a year or less, making such loans attractive to investors who are interested in “flipping” investment properties for a quick and easy profit.
How hard money lending works
Most conventional mortgage brokers work with institutional lenders– big banks and mortgage companies. Hard money lenders, on the other hand, work with private lenders who have made their private money available for investing. These private lenders are often retired or wealthy individuals who have money to invest, and their involvement in the loan process may be either active or passive.
If the hard money lender is working with active private lenders, then for each new loan request, the hard money lender must first decide if it fits the loan criteria for the lenders s/he works with. If so, the hard money lender approaches the individual private lenders to determine their interest in participating in the deal.
Once enough private money has been raised from the private lenders, the hard money lender places the money in escrow and the private lender(s) are on the mortgage or deed of trust as lenders. Once the deal is done, a loan servicing company collects the payments from the borrower and sends them to the private lender(s).
A hard money lender with a securities license can also work with passive private investors by raising a pool of money from private lenders and establishing specific, predetermined terms for lending the money. If a loan request fits those terms, the hard money lender makes the decision about whether to approve the loan, and the private lenders simply collect the loan payments sent to them through the loan servicing company.
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Anyone considering using a hard money loan for investing in real estate must make sure that the mortgage broker is really a hard money lender– because using a conventional mortgage broker could be a costly mistake.
Without using a hard money lender with direct access to private money for real estate financing, the real estate investor could end up paying thousands of dollars in multiple layers of fees and “points” that chip away at the borrower’s profit.
Determining who is a “real” hard money lender is relatively simple. S/he must be knowledgeable in both federal and state predatory lending laws, and most conventional mortgage brokers may not even be aware of these laws– so quizzing a potential broker on their knowledge of those sections of law is a good place to start..
What does hard money mean to the potential real estate investor? It means that anyone can invest in real estate, regardless of their credit or financial situation– and from there they can learn to rehab or flip properties for a quick (and often very large) profit.
Hard money makes wealth building through real estate a possibility for anyone who takes the time to learn the system.