A hard money loan referred to as a bridge loan is a short-term product used commonly by real estate investors including develops or flippers who tend to renovate and sell the properties they purchase. 

These are also good solutions for those with poor credit and facing foreclosure and have assets to show value for the creative loans. 

Real estate hard money loans are typically funded by private individuals or investor groups instead of traditional banking institutions and will use real property or equity to back the loan as collateral.

The Fundamentals of Hard Money Loans

Hard lending secured by the property you purchase instead of being based on a borrower’s credit score or financial profile. Approval is based on the property value and the term is short, less than a year. 

Some are structures as interest-only followed by a large balloon payment, making them somewhat risky compared to conventional financial solutions. These are distinct from a traditional mortgage in a few ways:

• Applying for and closing on a hard loan is typically faster and the terms are much shorter a 30-year time frame with traditional mortgage. You can usually repay these loans within roughly 12 months but sometimes the term can be longer.

• The interest rates are usually much higher for private loans and a hard lender requires a down payment that’s also higher than the traditional mortgage at roughly 20 or 30 + percent. Conventional lending is often provided for approx. 3 percent down.

• The traditional mortgage approval process is based on the borrower’s creditworthiness and financial profile while the private lending is based primarily on the value of the physical property, it’s equity. 

If you default on a hard money loan, you will also lose the asset you use for collateral. Visit – What Is a Hard Money Loan and How Does It Work? – tips for navigating short-term financing. 

Consider the following advantages and downsides of hard lending before you commit to working with one of the loan providers.

Pros

• Flexible loan terms: Lenders for hard loans are more flexible when negotiating terms. They don’t have the same regulations to contend with as a conventional mortgage loan provider.
• Speedy financing: The glacial pace of conventional mortgages can prove frustrating. Fortunately, that’s not the case with private lending which can be processed in a matter of days. Real estate investors are dealing with deadlines, fast closings when bidding a competitive property can mean the difference in getting it and losing the deal.

• Strong credit: Creditworthiness is not the focus for hard lenders. They’re more concerned about assets such as a house or other structure and the estimated market value after the intended remodel. These lenders will be less likely to ask about your financial history.

Cons

• Higher cost: Hard money lending is more expensive compared to conventional mortgages. Interest can be several percentage points higher than those for traditional loans, the upfront fees are also much higher. 

You can also be charged prepayment penalties for paying the loan off faster than the term stipulates.

• Large down payment: The down payment is substantial for hard loans, meaning you’ll put down much more of the purchase price to qualify for the product that you would for traditional lending. 

Typically, with a conventional mortgage, lenders ask for roughly 3 percent down. Private providers request as much as 30+ percent.

• Lending regulations: Hard lenders compare with payday providers in that they have little regulations to follow.

Hard money lending is better for a specific audience. Consider the following to see if you fall into one of these groups.

Property flippers

Investors who buy properties to make a profit by fixing them up and reselling them. These individuals are referred to as house flippers and they usually use private providers for financings because the lending is fast, it’s convenient, and approval is relatively simple and straightforward.

This gives them an edge over competition waiting for approval with conventional mortgage lenders.

Borrowers who don’t meet conventional loan criteria

Many reasons exist why some borrowers aren’t eligible for conventional 30-year fixed-rate lending from a traditional bank, anything that might impact credit score like a recent divorce or inability to document income, which can be a problem for some freelance business owners.

Self-employed people who write off a lot of deductions could afford a mortgage, but their taxes don’t show it. Hard money loans are their only alternative. Click here to learn what a hard money loan is.

Foreclosure with substantial equity in the house

It’s not common but some homeowners have substantial equity in their house but are at risk for foreclosure. Hard money loan providers would consider a loan if they were assured the product won’t default. They want to know they can sell the house, pay off the first mortgage, and still make a profit from the sale.