Hard Money Loans: Your Options Defined And Explained

What are hard money loans – and how do they differ from soft money loans as a form of real estate funding? If you’re looking to borrow cash to finance a home purchase, it’s important to know the answer to this frequently asked question.

For clarity’s sake, a hard money loan is one that comes from an individual or private lender (not a traditional mortgage lender) that is backed by real estate property or tangible assets as collateral. By way of contrast, a soft money loan (aka soft financing or soft loan) is a loan that is extended to a borrower with minimal interest and extended grace periods. Soft loans generally take a lighter touch than traditional loan products.

If you’re asking yourself, “What is hard money, and what do I need to know about hard money lenders?” let’s take a closer look.

As opposed to traditional home mortgages or personal loans, which come from banks, credit unions, and similar institutions, a hard money loan is a form of short-term loan that’s extended by an individual or private company. A hard money loan is backed by property or a tangible asset as collateral.

In general, these loan products typically come with shorter term lengths and higher rates attached to them than conventional mortgage options. Borrowers may look to hard money loans as a source of home financing if they’ve been turned down for a traditional loan. Alternately, especially if they’re a DIY rehabber or real estate investor, they may seek to obtain funds via this method as a way to skip the often lengthy process involved with applying for a conventional mortgage.

Be advised that hard money loans are a form of secured loan – and are guaranteed by the residential or commercial real estate properties that they are being used to purchase. In effect, if you default on your hard money loan, your financial lender can assume ownership of the home and sell it in hopes of recovering its lost income.

Unlike other forms of secured loan and traditional mortgage offerings, the application process for a hard money loan is typically faster, less demanding and less stringent. If you need a quick turnaround on a home purchase or purchase of a piece of commercial real estate, a hard money loan could be right for you. As opposed to traditional loans (which can take a month or more to complete), hard loans can help you facilitate them quickly … often in a matter of just days.

To summarize: A hard money loan, like a conventional loan, is secured by an asset, typically an investment property. In exchange for this guarantee, borrowers receive funds that they can use to purchase new real estate holdings. However, a hard money loan is typically issued by private investors or companies, not backed by a bank or traditional lender. Private lenders, unencumbered by industry regulations, can offer potential home buyers or commercial real estate buyers a faster approval process. But if you elect to take out a hard money loan, be advised: These financial offerings come with higher interest rates and higher risk attached.

Real estate investors and homebuyers may be interested to learn about possible sources of funding for hard money loans. Likewise, it may also help them to know that hard money loans can be a boon for anyone looking to acquire and renovate low-cost properties or fix and flip homes for a profit. Entrepreneurial sorts thinking of applying a DIY upgrade may wish to consider them. That’s because hard money loans can facilitate a fast project turnaround and are often preferred by real estate investors seeking rapid forms of financing.

A variety of private individuals, online fintech companies and specialty loan providers can help pair you with funding – a search of local and national directories or popular real estate websites will reveal myriad options here. Note that hard money loans are typically short-term loans (ranging from 1 – 3 years in length) and can be extended on both commercial real estate and residential properties. But while hard money loans can quickly help you gain access to money, you likely won’t want to hang onto them for long. That’s because attached interest rates are often quite high – think upward of 8-11% as compared to 3-4% for a traditional loan product.

Under the terms of a hard money loan, a lender will do a quick check of your credit score, credit history, and finances, look at the value of the property being purchased, and render a decision. They may also limit the amount of the home that it’s willing to finance given the lender’s preferred loan-to-value (LTV) ratio (for example, 70 – 80% of the home’s purchase price), requiring you to put down a higher down payment (though not always). Upon reaching a favorable determination, a loan is then extended that’s repayable in a matter of a few short years as opposed to the 15 – 30 years generally associated with traditional mortgages.

Overall, private lenders are fairly free to make up their own rules about which credit scores and debt-to-income ratios that borrowers are required to have, which gives them greater flexibility to extend applicants credit. But they’re also prone to requiring loan repayment on shorter terms, and – given preferred lower LTV options – may extend money in smaller amounts. 

Hard money loans can serve as bridge loans (short-term loans that can help you fill in gaps in financing resources, like to obtain funds needed rehab an investment property). But while both forms of loan are generally brief in time period, flexible in repayment terms, and secured by property, differences exist between these funding methods. For example, conventional home mortgage lenders may offer bridge loans that do not take the form of hard money loans and come at lower interest rates. Although largely interchangeable terms, you may see some differences in the actual loan product depending on who extends you your hard money or bridge loan and the purposes to which funds are allowed to be put.

There’s no such thing as easy money, in real estate or otherwise. Meaning that while hard money loans can connect real estate investors, home flippers, and aspiring home buyers with funds quickly, they often do so at higher risk and higher interest rates. But if you need rapid access to funding and intend to sell a real estate holding (especially an investment property) in a fairly short time following your initial purchase? They may prove a helpful financing option.