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Paying cash for a home or other real estate property simply is not an option for most buyers. Financing the purchase is the only option for many, but financing can take more than one form. A traditional mortgage is the loan type the bulk of the would-be buyers are familiar with. A hard money loan is another option, but not as many people fully understand how this type of alternative loan works or what is its purpose.

The Traditional Mortgage

A traditional mortgage is a standard loan issued by a bank or other financial institution such as a credit union or a special mortgage lender. The loans are issued at a particular interest rate that may be fixed or variable. Terms of a mortgage loan are 15 to 30 years. Anyone who takes out one of these loans does have the option to refinance in the future. The lender also has the option of selling the debt to another financial institution or even to an investor.

The Hard Money Loan

Hard money loans are similar to a traditional mortgage in the sense they are used to procure property. The differences, however, are significant. The most obvious difference is the funding comes from private investors instead of a bank. The private investment intended to support a hard money loans may even be part of a collective fund. Private lines of credit may even be issued. The key point here is a hard money loan is a privately-issued mortgage.

The Property and Borrower in Question

Hard money loan borrowers are mainly people interested in purchasing distressed or otherwise troubled properties for resale. A home that suffered from the ravages of a fire is not exactly a property a bank would be interested in financing. A hard money lender would be willing to put a loan in the hands of someone with intentions or repairing and reselling the home. Of course, the resale has to cover the interest, principle, and repair costs for the borrower to make a profit. The lender, however, is not interested in the borrower’s ability to make a profit. The lender simply has to feel confident the loan will be repaid.

The Pros and Cons of a Hard Money Loan

There are upsides and downsides to a hard money loan. For one, a hard money lender may be more willing to take a risk with a troubled borrower. Private investors who are not risk adverse or wish to put some of their funds into volatile ventures won’t be too troubled if the borrower has a marginally checkered credit history.

Closing with a hard money loan is a lot quicker. With a traditional mortgage, there are numerous steps to the closing process. Hard money lenders are more interested in closing the deal quickly — a plus for those who wish to move with buying a property.

A potential borrower has to accept a simple fiscal truism: higher interest rates are almost unavoidable. Due to the nature of hard money loans, the interest rates are going to be higher than a standard mortgage.

Additionally, a hard money lender is not going to set up a long-term repayment plan. The loans are higher-interest investment strategies designed to yield a return on investment in an expedient amount of time. Hard money loans may require repayments within a year. Investors and property flippers are likely the only borrowers who would be interested in a loan with terms of this nature.

A hard money loan is really not for everyone, but it is not intended to be either. Those who are a right fit for hard money loans do appreciate the opportunity the loans offer.