When you are a real estate investor, securing financing is one of the most important steps in turning a property into a profitable investment. If you have been wondering how hard money lending works, you are not alone. Hard money lending can be an excellent option for real estate investors who need quick access to capital but may not qualify for traditional loans.
Hard money loans focus on the value of the property rather than the borrower’s credit score or financial history. This makes them a more accessible option for certain investors compared to traditional loans. They are great for investors who may have poor credit or are looking to close a deal quickly.
What Is Hard Money Lending?
Hard money lending is a type of asset-based lending. Unlike traditional loans that are based on the borrower’s creditworthiness, hard money loans are secured by real estate. This means that the lender evaluates the value of the property being purchased or renovated rather than focusing on the borrower’s financial situation.
The loan is usually short-term, typically between 6 months to 3 years. It is used for projects such as fix-and-flip properties, buy-and-hold investments, and construction financing.
Hard money loans are generally offered by private lenders, such as local investors, lending companies, or specialized financial institutions like Coastal Capital Lending. Because these loans are secured by the property, lenders are willing to take on more risk, which allows them to approve loans quickly and with fewer requirements.
How Hard Money Lending Works
Step One: The Application
The first step in securing a hard money loan is to apply. This is typically much simpler than the process for a traditional mortgage loan.
Unlike traditional loans, which require detailed documentation about income, credit scores, and personal finances, hard money lenders focus more on the value of the property. You may still need to provide some basic personal information, such as your contact details and the details of the property you intend to buy or renovate.
Step Two: Property Evaluation
Once your application is submitted, the hard money lender will evaluate the property. The evaluation process is one of the most important steps in how hard money lending works.
The lender will assess the property’s current market value and its potential after renovations. This is called the after-repair value (ARV). It represents the projected value of the property after all repairs and renovations are completed.
Step Three: Loan Approval
Once the property has been evaluated, the lender will decide whether or not to approve the loan. If the loan is approved, the lender will provide you with the terms of the loan, including the loan amount, interest rate, repayment schedule, and any associated fees.
Hard money loans tend to come with higher interest rates than traditional loans because they are short-term and carry more risk for the lender. Interest rates can range from 8% to 15%. This depends on the loan terms and your experience as an investor.
However, the higher interest rates are balanced by the fact that hard money loans are easier to qualify for and close much faster.
Step Four: Loan Funding
After approval, the lender will fund the loan. Hard money loans are typically provided in stages, with funds being disbursed as needed. For example, the lender may provide an initial portion of the loan to cover the property’s purchase price. The remaining funds may be provided in installments to cover renovation costs.
Step Five: Repayment
Repayment of a hard money loan is usually structured to be completed in a short period of time, often 6 to 12 months. For investors using hard money loans for fix-and-flip projects, the loan is typically repaid once the property is sold. In some cases, borrowers may be able to extend the loan term if more time is needed.
Hard money lenders often allow interest-only payments during the loan term. This means you pay only the interest on the loan each month. This helps free up cash flow for your project.
Key Features of Hard Money Loans
To understand how hard money lending works, it is important to be familiar with the key features that set these loans apart from traditional loans. Some of the main features include:
- Asset-Based Financing
Hard money loans are based on the value of the property you are purchasing or renovating, not on your credit score or personal financial situation. The lender uses the property’s value as collateral for the loan, which reduces the risk for the lender.
- Short-Term Loans
Hard money loans are usually short-term, typically lasting between 6 months and 3 years. These loans are designed for short-term investments such as fix-and-flip projects or buy-and-hold rental properties. The short-term nature of the loan is one reason why the interest rates tend to be higher than those of traditional loans.
- High Leverage
One of the main advantages of hard money lending is the high leverage it offers. Hard money lenders often finance up to 90% of the property’s purchase price and 100% of renovation costs. This reduces the need for a large down payment. For this reason, it’s especially beneficial for property flips or major renovations.
- Higher Interest Rates
Because hard money loans are short-term and carry more risk for the lender, they tend to come with higher interest rates than traditional bank loans. Interest rates can range from 8% to 15%–depending on factors such as the loan amount, the value of the property, and your experience as an investor.
- Quick Approval and Closing
Hard money loans are known for their fast approval and closing times. While traditional loans can take weeks or months to close, hard money loans can be approved and funded in as little as 3 to 7 days. This is especially useful for real estate investors who need to act quickly to secure a property.
- Fewer Requirements
Unlike traditional lenders, hard money lenders typically do not require a lot of documentation. You do not need to submit detailed income information or undergo a credit check.
Instead, the lender will focus on the value of the property and your experience as an investor. This makes hard money loans an attractive option for investors who may not qualify for traditional loans.
Advantages of Hard Money Lending for Real Estate Investors
Now that we have covered the basics of how hard money lending works, let’s look at some of the advantages it offers to real estate investors:
Speed and Flexibility
The biggest advantage of hard money lending is the speed at which it operates. Since the process focuses primarily on the value of the property, hard money loans can be approved and funded much more quickly than traditional loans.
This enables you to secure financing and close on properties quickly. This advantage gives you an edge in competitive real estate markets.
Less Stringent Requirements
Another benefit of hard money lending is that the requirements are much less stringent than those of traditional loans. You do not need to worry about meeting strict credit score or income requirements.
For this reason, hard money loans present a good option for investors who have less-than-perfect credit or who may not meet the qualifications for a traditional loan.
High Leverage and 100% Financing for Renovations
As mentioned above, hard money loans often allow investors to borrow up to 90% of the purchase price and 100% of renovation costs. This high leverage can be especially helpful for investors who are flipping properties and need to cover significant renovation expenses.
Coastal Capital Lending offers 100% financing for renovation costs. This way, you can focus on completing your project without worrying about additional funds.
No Prepayment Penalties
Many hard money lenders, including Coastal Capital Lending, do not charge prepayment penalties. This means you can pay off the loan early if you sell the property or refinance it without incurring extra fees. The flexibility can save you money if you can repay the loan before the term ends.
Understanding Hard Money Loan Terms
As you move forward with understanding how hard money lending works, it is important to familiarize yourself with the key loan terms and conditions that are typically involved in hard money lending.
Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio is a crucial factor in determining how much a lender is willing to lend you in relation to the value of the property. For example, if a property is valued at $100,000 and the lender offers you 80% LTV, that means you will receive a loan of $80,000.
For investors, a higher LTV ratio means you can invest less of your own money into the project. However, higher LTV ratios may come with higher interest rates. As a result, it is important to evaluate the cost against the potential return on investment (ROI).
Interest Rates and Fees
While hard money loans are typically easier to secure, they often come with higher interest rates compared to traditional loans.
As mentioned above, interest rates for hard money loans typically range from 8% to 15%, depending on factors like loan size, the project’s risk, and the investor’s experience. The rates are higher because the loans are short-term and riskier for the lender.
However, despite these higher costs, the speed and flexibility of hard money loans often outweigh the additional fees. For real estate investors, the ability to close deals quickly and finance projects without extensive documentation is a key advantage.
Repayment Terms
Hard money loans are short-term loans. Most terms range from 6 months to 3 years, which suits investors looking to quickly turn over properties through renovations and resales. The short-term nature of these loans means that borrowers are often expected to repay the loan either through the sale of the property or through refinancing.
If your fix-and-flip project is taking longer than expected, we offer loan extensions to keep you on track and avoid unnecessary penalties. Understanding your repayment terms upfront is key, so make sure to discuss your options with your lender to make sure everything aligns with your project timeline.
Coastal Capital Lending makes borrowing a hard money loan simple and straightforward. With fast closings, high leverage, and minimal documentation requirements, we help you secure the funding you need to succeed in your real estate investments.
Contact us today to discuss your project and learn how we can help fund your next venture. With the right financing in place, you’ll have the tools to succeed in the competitive world of real estate investing.
