[Updated October 2020]
There are several ways to finance a real estate purchase. Conventional loans from a local bank and government loan programs are what most people think of, but there’s a third option: hard money loans.
What is hard money?
Hard money is a loan financing option provided by private lenders and backed by assets—usually the real estate in question—rather than the borrower’s credit. Hard money lenders are not restricted by the same regulations as major financial institutions, so hard money loans are more flexible than conventional mortgages or construction loans.
Benefits of hard money loans
Why use hard money? There are several distinct advantages to financing your real estate project with a hard money loan:
- Speed — Hard money lenders focus more on the collateral and less on your personal financial situation. They’re also not bound by the same rules and regulations as banks, so they can offer fast turn-arounds for approval and loan closing. That means you get a leg up on competing buyers going with more conventional financing routes.
- Flexibility — If you need more flexible loan options, you can talk to a hard money lender about tweaking some terms. Where large financial institutions have rules and terms set in stone, hard money lenders have more options.
- Security — A hard money loan is backed by the property for which it was granted, rather than your personal credit and assets. If the worst does happen, you won’t lose your primary residence.
- Approval — Because, again, a hard money loan is financed by a private lender and backed by actual real estate, many hard money lenders will invest in projects and borrowers that major financial institutions won’t. If your credit score is recovering, for example, a hard money lender can choose to finance your loan, even if a bank can’t.
Disadvantages of hard money loans
Hard money loans were designed to meet a specific need, so they’re not a perfect solution for every situation.
- Cost — Hard money loans have short lifespans—usually 12 to 18 months. Because of this, they come with interest rates that are about 10% higher than standard mortgage interest rates.
How hard money loans work
Hard money loans work best for flipping properties, construction loans, and securing investment properties. The short duration and high interest rates assume that the loan will be paid off within two years, which is usually done by selling the property or securing a standard mortgage for a primary residence.
Applying for a hard money loan is similar to applying for a standard investment or construction loan, although you won’t need to worry about your credit score or tax returns, and there’s no need to prequalify.
Tips for finding a hard money lender
Because hard money loans are not regulated the way traditional loans are, terms and requirements vary from one lender to the next. If you’re considering a hard money loan, make sure to find the best lender.
- Local — Local hard money lenders are often more flexible and easier to work with than national lenders. They’re familiar with your local real estate market and trends, and can become more of a partner in your project.
- Reliable — Find a hard money lender with a good reputation. Look for reviews on third-party sites like Google, and ask other builders or flippers in your area. Make sure your chosen lender can provide a portfolio of successfully completed projects.
Reach out to a few hard money lenders in your area and see what they have to offer. Ask about their requirements and how familiar they are with your area or your type of project.
Texas hard money loans
If you’re looking for a hard money lender in Texas, our team at Loan Ranger Capital would love to talk about your project.
We’re the quickest private lender in Texas, so you can get to your construction or renovations quickly. We offer some of the lowest rates in Texas, and have cut out all the junk fees that some other lenders still charge.
We work with builders and flippers from Austin, to Dallas, to Houston, and many of them keep coming back because of the excellent customer service they get from our team.
A quick guide to hard money
Hard money loans were designed specifically to service short-term real estate investments. If you’re looking at flipping a property or building something new, the benefits of hard money far outweigh the challenges.
Start by putting together a clear project plan, and then start shopping around for a reputable, local hard money lender. Finding that perfect lender will help your project hit the ground running so you can optimize your return.