What Is Hard Money and How Does It Work?

What is a Hard Money Loan?

A hard money loan, also known as a private money loan, is a short term loan. It is called “hard money” because it relies on hard assets as collateral.

Hard money loans are typically used to finance the purchase of real estate property such as a house, commercial land, or vacant property.

The loan period is generally 1-2 years, but can be up to 5 years under certain circumstances.  Payments are interest only, with a balloon payment at the end of the term period.  

What is a hard money loan used for?

Hard money loans play an important role in real estate rehabilitation. They provide real estate investors with funds to improve and increase the value of properties that may be in bad repair.

A hard money loan can be used to finance the purchase or repair of rental properties, apartment buildings, vacant single family homes, office buildings, industrial warehouses, commercial properties, construction and rehabilitation projects, and even vacant land.

How much can I borrow?

Property value determines the amount of money that can be borrowed. Typically you can borrow up to 80% of an existing property value or use the property you intend to purchase as collateral.

Why can a hard money lender finance my property when a bank can’t?

A traditional bank looks at the borrower’s credit to decide whether or not they will approve the loan. A hard money lender focuses on the value of the property being used as collateral. This means a borrower who has poor credit or is facing foreclosure can still get a hard money loan if they have sufficient equity.

Why use a hard money loan instead of a traditional loan?

Getting a traditional loan can be a very time consuming process that requires lots of paperwork and proof of employment, funds, and other requirements. A private loan offers a much quicker process with the main focus being on the asset you plan to use as collateral.

Given the choice, many investors prefer to pay a higher interest rate to skip the time consuming process and hassle of going through a traditional lender.