A hard money lender is an investor who makes loans secured by real estate, typically charging higher rates than banks but also making loans that banks would not make, funding more quickly than banks and/or requiring less documentation than banks.
Hard money lenders differ from bank lenders in that they often fund more quickly, with fewer requirements. Hard money lenders are sometimes called “asset-based lenders” because they focus mostly on the collateral for the loan, whereas banks require both strong collateral and usually excellent credit and cash flow from the borrower.
Hard money lenders are willing to foreclose on and “take back” the underlying property if necessary, to satisfy the loan. Bank lenders typically look at the borrower to be able to pay back the underlying loan from the borrower’s income, whereas hard money lenders are comfortable looking to a sale or refinance of the property as the method of repayment.
Why do hard money lenders exist?
Hard money lenders exist because many real estate investors need a quick response and quick funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency in their decision making process, along with quick access to capital.
When does it make sense for developers to use a hard money loan?
In our experience, even investors/developers with strong financial statements and access to bank credit frequently choose to use private money loans (also called “hard money loans”). Situations where private money loans make the most sense include those where the borrower:
- Has more good opportunities than cash;
- Wants to avoid spending too much time raising equity or debt from many different smaller investors, but prefers to instead focus on finding new opportunities;
- Lacks the patience or time to deal with the bureaucracy of securing a loan from a bank;
- Has an excellent investment opportunity, but does not have sufficient financial strength to get a bank loan, and/or;
- Has a bank line of credit but needs a larger loan than is allowed under the existing bank line.
The common theme is that there is an opportunity for the borrower to generate substantial profit (or savings) quickly, and the cost of interest and origination fees is small relative to the anticipated profit, even given the higher interest rates charged by private lenders versus banks.
What are other terms for hard money loans?
Hard money loans are also sometimes referred to by the following terms: (1) private money loans; (2) bridge loans; (3) short-term loans; (4) transitional loans; (5) asset-based loans; (6) rescue loans.
Are hard money loans used mainly when the borrower is in distress?
Some hard money lenders do focus on distressed situations such as when the borrower has another loan in default and needs to refinance. This is particularly true for commercial bridge loans.
In the single family residential arena, most hard money lenders shy away from distressed borrowers who are owner-occupants. Lenders are not eager to foreclose on a borrower living in his or her own house. Furthermore, regulations make this type of foreclosure much more time consuming and difficult as compared to an investor-owned property.
What are advantages of hard money lenders?
- A simpler application process and quicker approval/disapproval decision;
- Less scrutiny of the borrower’s personal financial situation, including income and historical tax returns, compared to bank loans;
- Borrowers can allocate less time to seeking financing and instead concentrate on other business;
- Borrowers can avoid the humiliation of being rejected by a bank;