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Hard Money Loans: What You Need to Know

Hard Money Loans: What You Need to Know
Susan Guillory
Susan GuilloryUpdated May 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re looking to buy real estate for business purposes and haven’t been able to qualify for a traditional commercial mortgage, you may worry that you’re out of options. Maybe your credit score is low, which can mean you don’t qualify for a bank or Small Business Administration (SBA) loan. Or, maybe you’ve already overextended your credit with other real estate investments.You still have another option to consider: a hard money loan. Just be mindful that these come with their own set of advantages and disadvantages.

What Are Hard Money Loans?

A hard money loan is a type of short-term bridge loan that is secured by real property. Unlike a traditional commercial mortgage, the lender is usually an individual or company rather than a bank. A commercial borrower may turn to a hard money loan after having a loan or mortgage application denied, or to avoid the lengthy process of getting approved for a loan through traditional means. For example, someone who wants to flip a house might use a hard money loan.

How Hard Money Loans Work

Now let’s review how a hard money loan works.There are some key differences between a traditional small business loan and a hard money loan.Traditional lenders may look at qualifications like credit scores, your revenues, and how much debt you carry. Hard money lenders care less about those qualifications. For hard money lenders, the most important factor isn’t the borrower’s creditworthiness, but the value of the property being purchased. As a result, loan applications can be processed much more quickly since there's less paperwork. Rather than waiting weeks to get your funds, you may get your money in just days with a hard money loan. It’s also possible to find a hard money lender who will give you a loan even if you’ve been denied by more traditional lenders. Recommended: The Complete Guide to Buying Commercial Property 

Pros and Cons of Hard Money Loans

Now let’s look at some advantages and disadvantages of hard money loans.
ProsCons
Can help you get money when you don’t otherwise qualify for a loanThese are short-term loans
Can get you your money more quicklyInterest is higher than for traditional loans

Pros

One of the biggest upsides to hard money loans is that, when you don’t qualify for any other type of financing, you still have the option of a hard money loan. If you have a fantastic opportunity to buy a piece of real estate, a low credit score won’t hold you back from purchasing it.And while it might take weeks or even months to get a traditional loan application processed, approved, and then funded, you can typically get your cash within days with a hard money loan.Also, if you work with an individual who’s willing to lend to you, you may be able to work out flexible payment terms, which can help you manage cash flow.

Cons

One of the drawbacks of hard money loans is that they are short-term loans. You’ll need a solid plan for how you’re going to pay back the money you borrow within a few years at most. Traditional mortgages can be 15 or more years, which typically means lower monthly payments. And, because a hard money lender is taking on more risk than a traditional lender, you’ll typically pay higher interest. That can cut into your profits if you’re buying real estate to flip, and it can add to your monthly mortgage payment significantly.Finally, since the property you’re buying is your collateral for the loan, you risk losing it if you are unable to pay your mortgage. The lender has the right to seize and sell the property to recuperate losses.

Hard Money Loan Rates

Hard money loan interest rates will vary from one lender to another, and will also depend on how much you borrow and your qualifications. Generally, they are higher than traditional mortgage rates and can run between 8% and 15%.Since the property itself is used as the only protection against default, hard money loans usually have lower loan-to-value (LTV) ratios than traditional loans: around 50% to 75%, vs. 80% for regular mortgages. If a lender will only finance 50% to 80% of the property’s value, you’ll need to bring a sizable down payment to the closing table. If you don’t have the cash for this, you might have a tough time finding a hard money lender who will work with you.

Other Fees

It’s important to note that interest rates aren’t the only charges you’ll be paying. Other fees may include:
  • Appraisal fee
  • Loan documents
  • Administration fee
  • Credit report fee
  • Flood certificate
  • Monthly servicing fee

Getting a Hard Money Loan

Now that you know that hard money loans generally come with high interest rates and fees, you can make an informed decision. If you decide to go ahead, here’s how to get a hard money loan.Once you have a lender or lenders in mind, start by researching the LTV the lender requires. For example, you might see an LTV of 75%, meaning you will be required to make a down payment of 25% of the purchase price.You’ll also need to gather information about the property you want to purchase, as well as details about all the real estate property you own and any other mortgages you have. Next, you’ll need to fill out the application using the property you’re buying as collateral. It may take a day or two for the lender to make a decision.Hard money loans tend to be processed quickly, so, if approved, you may be able to close the deal within a few days.

Hard Money Loan Alternatives

Hard money loans are just one of several kinds of real estate loans for businesses. If you’ve got the time to work on building your credit score and reducing your debt, you may qualify for other types of loans like the following.

Commercial Mortgages

If you qualify for a commercial real estate loan through a traditional lender, you can get long repayment terms and low interest.

Construction Loans

If you’re building on land, you might look into a construction loan, which is a short-term loan used to finance the building of a real estate project. Interest rates for these loans tend to be higher than traditional mortgage loans, however.

SBA 7(a) Loans

If your credit is good, you may qualify for a loan backed by the Small Business Administration (SBA). If you need to borrow under $25,000, there are no-collateral loans available.

Applying for Business Loans

Before jumping into a hard money loan, you may want to explore your other financing options. With Lantern by SoFi’s online debt financing marketplace, you can access small business loan options (including SBA loans, lines of credit, and short-term loans) without scouring the web and checking multiple sites. With one short application, you’ll be matched with a loan option that meets your company’s needs and qualifications.Let Lantern help you find the right financing solution for your small business.

Frequently Asked Questions

What are examples of hard money loans?
How much do you have to put down on a hard money loan?
Why is it called a hard money loan?
Photo credit: iStock/fizkes
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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