When investors discuss money as it relates to lending, they use two terms to differentiate it – hard and soft money. Soft money typically refers to a loan with flexible terms. Traditional and government home loans offer a variety of options for a real estate loan. A hard money loan, on the other hand, has rigid, very specific terms. It is loaned for a relatively short time frame with a specific interest rate not necessarily determined by your credit score. It is also called “private money,” because it often originates from individual investors who possess a lot of cash to invest.
Some characteristics that set these loans apart from a more traditional one are high interest rates, a brief approval time frame and the loan is most often for a short period of time. Low loan to value ratios are also typical of hard money loans. Often no more than 60 percent is approved for the loan. High interest rates are the hallmark of hard money loans, up to 21 percent and higher if the property goes into default. Hard money loans are borrowed for very short periods of time, and can often be obtained within a few days, as opposed to weeks for a more traditional property loan.
Hard money loans are most often used for flipping a home, bridge loans and construction loans where the money would only be borrowed for a short amount of time, until the property is sold or refinanced. An investor may find a home that is in need of repair at a very good price. Obtaining a hard money loan may be a way for the borrower to buy the home, repair it and make a lot of money when the property is sold.
These loans are usually not used to finance property over a period of years. Homeowners who have no credit history or experienced a default in home ownership often cannot obtain approval for a traditional loan with a lower interest rate. They will sometimes borrow hard money until their credit score raises enough to be approved to refinance using a traditional loan with a much lower interest rate.
If you’ve tried the traditional route to obtain a home loan and failed, you might want to try for a hard money loan. Obtaining approval for one is not as easy as it used to be in some cases. In the past, hard money lenders based the loan strictly on the value of the property. Now, however, many of them require borrowers to fill out credit applications and provide pay stubs and income tax statements. Before applying for a loan, make sure you have access to any income statements the lender may require.
The best way to access a hard money lender is to contact local lending institutions and mortgage companies. Ask them for names of reputable lenders. Most loan servicers are familiar with ones they’ve known over a period of years.