Most loans require proof that you can repay them. Usually, lenders rely on your credit scores and your disposable income to evaluate your ability to repay a loan. If you have a solid history of borrowing responsibly (generally measured by your debt to income ratio) and you’ve conducted the due diligence to determine that your property will create a return, you’ll get approved for a loan.

Getting approved with a traditional lender is a rather slow process – even with great credit scores & plenty of income. If you have negative marks against your credit or an income that’s difficult to verify, the process takes even longer and you might not ever get approved.

Hard money lenders take a different approach:

they lend based on collateral, and they are less concerned about your ability to repay. If anything goes wrong and you can’t repay, hard money lenders plan to get their money back by taking the collateral and selling it. In general, the value of the collateral is more important than your financial position.

Hard money loans are generally short term loans, lasting from 6-36 months usually. Since interest rates for hard money are higher than they are for traditional loans, a typical borrower wouldn’t want their loan to survive for the long term.

Why Use Hard Money:

Hard money, although expensive on the interest front, has its place for certain borrowers who cannot get traditional funding when they need it.

Speed:

Because the lender is mostly focused on collateral (and less concerned with your personal financial situation), hard money loans can be closed more quickly than traditional loans. Although lenders would rather not take possession of your property, they don’t need to spend as much time going through a loan application – verifying your income, reviewing bank statements, and so on. Once you have a relationship with a lender, the process can move especially quickly, giving you the ability to close real estate deals that others can’t.

Flexibility:

Hard money lenders don’t use a standardized underwriting process. Instead, they evaluate each deal individually. Depending on your situation, you may be able to negotiate terms like repayment schedules and interest rates. Often, you’ll be borrowing funds from a team that’s willing to talk – not a large corporation with strict policies.

Approval:

If you’re buying an investment property, the lender will only lend as much as the property is worth (in fact, usually only up to 80%). If you need to borrow against a different property you own, that property’s value is what the lender cares about. If you’ve got a foreclosure or even other negative items in your credit report, it’s much less important – some lenders might not even look at your credit.

Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low. Some firm’s maximum LTV might be 50% while others may reach that 80%. Do your homework and know which firm is right for what you need. With lower ratios, lenders know you need less help to close the deal and sell your property quickly — so they have a reasonable shot at getting their money back or even make a profit.

So, when does Hard Money make sense?

Hard money loans make the most sense for quick cash needs on viable properties. Fix-and-flip investors are a good example of hard money borrowers: they own a property just long enough to increase the value and sell the moment they find the right offer. 

Finding Hard Money Lenders

To borrow money, you’ll need to get connected with investors that lend money based on collateral. The process has been historically slow due to the fragmentation of the Lender’s applications. That was the case until Scout was created, allowing lenders to make a listing about their property and, for the first time in HML history, have lenders look for the borrowers.