Hard Money: What It Is and How Hard Money Loans Really Work

Hard money loans typically come from high net worth individuals who are willing to lend money on real estate, as long as there is substantial equity in the property. These types of lenders are known as collateral based lenders – they make real estate loans based on the collateral instead of the credit qualifications of the borrower.

Hard money loans are typically used by people as short term loans – those who plan on flipping - selling the house within a short period of time – or are using the loan as a bridge while repairing their credit to qualify for more favorable long term financing. The origination fees and interest rates are much higher than on a traditional bank loan.

Hard Money is Easier and Faster to Obtain

Hard money loans are ideal for time-sensitive opportunities like commercial and residential investment properties. In many cases, the deal is so good that if you don’t immediately secure the property, someone else will steal it out from under you. Unexpected opportunities to purchase investment properties are what make hard money loans so essential in our society.

Hard money lenders don’t require the same paperwork and credit checks as a traditional loan, which will make the approval process so much simpler. They are also significantly faster, which means you can have the money for your mortgage in as little as a few business days instead of weeks or months. Since the primary consideration is the equity in the property, the underwriting process is much quicker than with a traditional loan.

Build Lasting Relationships with Hard Money Lenders

Developing a long and mutually beneficial relationship with hard money lenders will be necessary, especially if you are hoping to make a living flipping houses. Most hard money lenders will give people a reduced interest rate or lower origination fees once they have dealt with the same person for several different investment properties.

Using the same lender will help create trust, because it shows them that their hard-earned money will be returned. These lenders don’t actually want the asset that is used as collateral; they want their hard money loan back, plus any interest that has accumulated.      

Hard Money Lenders are Not Ideal for Long Term Loans

Hard money loans are for fast transactions, and they should be paid back within a year or two. Because the interest rates are so much higher, it is in the best interest of the borrower that they make sure they can pay back the loan as quickly as possible. You will be better off financially trying to secure a traditional mortgage from a bank if you have good credit and you do not plan on selling the property within the first two years.  

Hard money loans are the fastest and easiest way to secure money for investment properties, especially if you have a less-than-perfect credit score. Most hard money lenders will grant real estate loans based strictly on the collateral, which is perfect for anyone who is hoping to make money flipping real estate.


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