Unless you have had a reason to apply for a hard money loan, there is a good possibility that you don’t know much about this particular segment of the financial sector. Hard money has been a viable funding resource for generations. But its applications are limited, so your average person on the street wouldn’t be expected to know much about it.
How much do you know about hard money lending? If your knowledge is limited and you would like to know more, this post is for you as it lays out all the basics. After reading, you might decide that hard money could be a good tool for helping you reach your financial goals.
It’s Asset-Based Lending
Hard money lending takes its name from the fact that it is asset-based lending. What does that mean? It means that lenders make approval decisions based primarily on your assets. By contrast, a bank would base its approval decision on your demonstrated ability to pay combined with your past credit history.
According to Actium Partners in Salt Lake City, UT, hard money lenders do not spend a lot of time looking into borrower credit histories. They don’t ask for reams of documents and financial statements. What they look at is the asset being acquired or, in some cases, a separate piece of collateral. That is what approval is based on.
Collateral Is Key
Collateral is key to any hard money loan. It is that which ultimately determines whether a loan application will be approved. In most cases, the collateral is real estate. A hard money lender wants to see that the real estate in question has more than enough value to cover the amount being borrowed. The lender also needs to be reasonably assured that the asset can be sold in the event the borrower defaults.
Most Loans Are for Investment
Although hard money lenders can lend for any reason, most of the loans they make are for investment purposes. A good example would be the property investor who turns to hard money to obtain a new multi-family rental unit. The loan will fund his acquisition while the property itself will act as the collateral.
Hard Money Is Short Term
One of the signatures of hard money is a short term. Very few hard money lenders will exceed three years; most insist on two years or less. As you can imagine, this makes it impossible for people to use hard money to buy their primary residences. They cannot get a 30-year mortgage from a hard money lender.
Interest Rates Are Higher
Along with shorter terms, hard money always comes with a higher interest rate. How high? That depends on the lender. It is not unusual for hard money rates to be at least several percentage points higher than standard rates. This is due to risk. Lenders take more risk with hard money. They make up for that risk with higher interest rates.
Lenders Have Their Specialties
Most retail banks offer specific types of loans for specific types of purchases. Hard money is somewhat similar in that many lenders have their specialties. For example, Actium Partners specializes in real estate investments. They have been known to make loans for other purposes, but most of their loans go toward acquiring commercial properties.
There are other hard money lenders who specialize in fix-and-flip and residential rentals. They serve an entirely different clientele compared to Actium.
Needless to say, there is a lot to know about hard money. It is not typical bank lending by any stretch of the imagination. Utilized properly, it’s a fantastic tool for meeting certain financial needs.
