What are Hard Money Loans, and How Do They Work?

If the phrase “hard money” inspires you to start quoting lines from your favorite gangster flick, we wouldn’t be surprised. While these types of loans may sound tough and intimidating, they are a commonly used financing method many real estate investors use.

But what are hard money loans, and how do they work? We’ll explain all that and more here.

What is a Hard Money Loan?

Unlike conventional loans, where lenders assess the borrower’s lending history, credit, income, and more, hard money lenders are willing to accept the property as collateral for a short-term loan.

Hard money loans generally come with higher interest rates and shorter repayment schedules. So, why choose a hard money loan over a conventional one? To answer that, we should first consider the advantages and disadvantages of hard money loans.

Advantages & Disadvantages of Hard Money Loans

Like every financial tool, hard money loans come with advantages and disadvantages. And whether you’re a real estate investor looking for quick funding or an everyday borrower looking for alternative lending options, it’s important to consider the pros and cons of this form of lending.

Advantages

One of the advantages of a hard money loan is that processing time is faster than a conventional loan. Hard money transactions generally close in days compared to months with a conventional loan. Additionally, lending criteria are generally flexible, making them ideal for borrowers with less-than-perfect credit or unconventional financial circumstances. They also offer better investment opportunities. For instance, a hard money loan may be a viable alternative if you are interested in a fixer-upper that might not qualify for traditional financing. You can also use your current real estate holdings as collateral on a hard money loan.

Disadvantages

Hard money lenders typically reduce risk by charging higher interest rates and offering shorter repayment schedules. They also frequently come with high underwriting and processing fees and prepayment penalty costs. Additionally, because private individuals or non-institutional lenders offer hard money loans, they are not subject to the same regulations as conventional lenders, which make them more risky for borrowers.

Are Hard Money Loans Right For You?

Whether a hard money loan is right for you depends on your situation. Hard money loans are good options if you were denied a conventional loan and need non-traditional financing.

However, as with any big financial decision, it's always best to weigh the risks and costs and devise a good plan for paying off the loan before signing the dotted line.

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