The name “hard money loan” may seem daunting, but it can actually be a really great tool for a real estate investor. Before you consider getting a hard money loan, it’d be a great idea to know exactly what one was.

What exactly is a hard money loan?

A hard money loan is a real estate loan that is based off of the value of your collateral rather than your ability to pay the loan back.

There are several types of hard money loans available. They include the following:

Bridge loan:

This type of loan is an extremely short-term loan that enables someone to buy a property quickly so that they can sell it or refinance it.

Owner-occupied loan:

This loan helps people who don’t qualify for other types of loans purchase property for themselves

Construction loan:

This type of loan helps a developer quickly get started on a new construction project so they can fix it up and sell it

What are hard money loans for?

Hard money loans are primarily used for investment purposes. They’re not used for real estate loans where people will be living in the properties they purchase themselves.

What’s the difference between a hard money loan and a traditional loan?

There are several key differences between traditional loans and hard money loans.

  • Hard money loans come from individuals or organizations instead of a traditional bank.
  • Hard money loans have a much shorter repayment period, usually lasting about a year or so. This is simply because the loan is only intended to last a short period before the purchased property is flipped or refinanced..
  • Hard money lenders are a lot more forgiving of dark spots on a person’s credit rating like poor credit scores or bankruptcies. These hard money lenders are more concerned with the value of the real estate that’s going to be used as collateral for the loan.

What are the benefits of getting a hard money loan?

There are several benefits to getting a hard money loan. They include the following:

  • You get your money quickly, usually within the week or less rather than the much longer time it takes to get money from a traditional lender.
  • The terms are a lot more flexible since you’re working with individuals and organizations directly. They’re much more likely to tailor repayment terms to your needs.
  • You’ll be able to respond quickly to fast moving real estate deals instead of missing out because you don’t have the funding, making these types of loans really great for investors.

The downsides to hard money loans.

There are a few downsides to hard money loans that you should consider when you’re thinking of applying for them. Those downfalls include the following:

  • They have really high interest rates, especially when compared to traditional loans. These interest rates often go high into the double digits.
  • There is little oversight when it comes to hard money loans, making it easier for you to fall victim to unscrupulous lenders. Do your homework.
  • These types of loans usually have a lot of high fees, including underwriting fees, early payment penalties, origination fees and construction draw fees.

Should you go for a hard money loan?

In spite of the downsides to hard money loans, there are many reasons that you should consider going for one. You may have stumbled upon a can’t-miss real estate opportunity, and you can’t get funding elsewhere. Maybe your credit score is really low, preventing you from getting a traditional loan or a personal loan. If you are able to land one, you’ll most likely get it at a very high interest rate. Maybe it’s simply that you need money quickly, a situation that is very common in markets where real estate rarely spends less than a day on the market before being snatched up.