Hard money lending has a bit of a bad name. People tend to think that hard money lenders are in it for the dough - that they simply want to lend money so that they can ask for a huge interest rate. But the difference between hard money lenders and banks is that hard money lenders are willing to lend to "unlendables" - people that wouldn't be able to get credit in any other way. The quicker you can turn around the house sale, the better - you'll pay less interest. Read on to learn everything you need to know about hard money lending in our dummie's guide.
- The basic definition of a hard money lender is an individual or a group of individuals or brokers who lend money for the purpose of securing a house loan. That's it. They don't necessarily provide finance to investors only - they provide finance to anyone who needs it.
- Before you look for a hard money loan, there are plenty of things you need to do. Research, research and more research will stand you in good stead. It's really important that you actually work with a hard money lender, rather than just some guy lending money to people. Hard money lenders should be registered and they're regulated by the financial system in the same way that banks are, so you're always protected. Working with a hard money lender that isn't regulated will just cause problems further down the line, so make sure that you find the right lender.
- You can't just go to a hard money lender and expect them to give you some money, especially if you're completely new to buying houses and flipping them as they'd probably just laugh you out of their office. When you're trying to flip a house, you need to look at spending no more than 70% of the market value. Again, if you want to spend too much on a house, they'll laugh you out of their office. The idea is that a hard money loan is a short term loan, sometimes called a bridge loan, that pays for the repairs that you need to make to the property. When you sell the property, you should be making a substantial profit, taking into account the amount of money that you put into the property, the loan that you took out to pay for the repairs and the cost of the loan. You'll need to go to your prospective lender and explain to them these figures. They need to know - and all they really care about, actually, - is making sure that you make a profit. Because if you make a profit, you can pay back the loan.
- If you don't pay the loan back, the hard money lender has collateral, which means they'll be able to get their money back. The collateral taken by the lender really depends on the lender that you're working with and the specific deal that you're trying to finance. Generally, the collateral will be the house that you're trying to buy. If you can't sell it, and you can't make that profit, they can seize the house as the asset. Alternatively, you could secure the loan on something like a high value vehicle or an additional property that you own. This is why the hard money lender is called a hard money lender - because they secure their loans on hard collateral, which basically means a physical product that you can sell for profit.
- This is essentially why hard money lenders are always more willing to lend to someone with rubbish credit. Because they know that even if your credit is bad, even if you have a history of not paying back your credit in a timely manner, they'll still get their money back. Sure, it's a bit of a pain in the butt for them, but that's why you pay a higher interest rate - for that privilege. Typically, you'll be looking at an interest rate of between 30 and 40%, but many hard money lenders can lend anywhere from $25,000 to upwards of $1million depending on your circumstances and on the deal and they'll often be able to lend within just a few short weeks or a month, which is much faster than a normal bank would be able to get the funds to you.
- A benefit of using hard money lenders is that they provide you with the money you need and they provide it quickly. Because they can fund the loan so quickly, it means that you can put in the offer and you can put in the offer quickly. Because you'll have the funds, and you'll have them in cash, you'll be able to close on the deal more quickly - which means that the buyer is more likely to choose you over an alternate buyer as you'll be able to proceed more quickly and complete more quickly, so they can move onto their next home.
- Hard money lending, at its very heart, is simply the process of lending money to people who want to buy, rehab and flip homes. You won't usually be able to use a hard money lender to finance your own home unless there's a specific reason why you can't come up with the funds for it yourself - and if you can prove that you'll have the money come in a month or two (for example if you're getting a redundancy payment or are due an inheritance from somewhere. Generally though, as long as you have collateral of some description that the lender can secure the loan on, they'll be happy to lend provided that the deal sounds good and they know they're going to get their money back in some shape or form within the agreed upon period of time.