Explaining Hard Money Lenders

Part 1

Hard money lenders are individuals or small companies that have funds available for investment. They have the advantages of being flexible and able to move quickly. This is especially useful for people whose circumstances may preclude them from borrowing money from standard institutional lenders. For example, someone whose house is facing foreclosure or an investor that has come across a great deal but must act speedily to get it, generally could not depend upon a bank or mortgage company to meet their needs. This is where hard money, or non-conforming, lenders come in. They are not restricted to the rigid loan criteria of institutional lenders.

To fully understand what a hard money lender is, we must first understand the concept of hard money as opposed to soft money . With regard to finances, hard money refers to funds that come with much stricter loan terms. These terms almost always include higher interest rates and points (often much higher), shorter repayment periods or balloon payments, and much lower loans-to-value (LTVs). Repayment schedules are also very inflexible. In contrast, soft money generally comes with easier terms than those described above, along with more flexible payment schedules. For instance, in the case of a real estate investor, debt repayment may be structured to be subject to the available cash flow of the property.

Notwithstanding the definitions of hard and soft money, hard money can be considerably easier to obtain than soft money. This is because soft money comes from institutional lenders and the criteria which they must use to approve or decline funding (especially for purposes involving real estate) is much more stringent than that of hard money lenders. Generally speaking, hard money lenders are people individuals that you can talk to, get to know and become comfortable with. They, like other people, have the capacity to be very flexible in their decision-making. Whereas institutional lenders are concerned first and foremost with a potential borrower s creditworthiness and ability to repay, hard money lenders tend to put more emphasis on the subject property than on the prospective borrower. In other words, if they see the property as a viable investment project, the borrower becomes secondary because they have their security in the property itself.

They have this security because they will rarely make a loan which is above 60- to 70% of the renovated value of the property. So, if the borrower defaults on the loan, the lender can feel quite secure that his or her investment can be recouped. Also, with terms so favorable to the lender, a respectable profit is virtually built-in to any deal that is funded.

Hard money lenders can be a tremendous resource for those who, for one reason or another, can t or don t want to use traditional funding. They can be true deal-savers for investors, especially beginners, who may be short of capital and/or credit. Because of their flexibility in approving loans and the speed with which they can supply funding, hard money lenders fill a very definite void and provide a much needed service. Without them the real estate market, particularly investment real estate, could not function with the efficiency with which it does today.

In Part 2 of this series, we’ll look further into the history, costs, and uses of hard money lending.

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