Hard Money

What is Hard Money?

Hard money comes with many different meanings depending on the context and can relate to currency, loans, and political donations, to name a few. In general, it refers to a specific funding chain that is generally provided by a government agency or other financial organizations. Rather than a one-time permit, hard money is a flow of funds that comes in the form of ongoing and scheduled payments that consistently benefit the user.

Another way to describe hard money is actual physical currency. In such a case, hard money would represent coins made out of precious metals, such as platinum, silver, and gold.

What is a Hard Money Loan?

A hard money loan is a type of financing that a borrower receives with physical property used as loan collateral. The loan – most often issued by private investors or non-bank financial companies – is typically used to provide relatively short-term financing. Hard money lenders expect to see their principal loan amount, plus interest, within one to five years.

On account of risk, hard money loans come with higher interest rates because they can lead to a substantial financial burden if the borrower defaults on the individual investor or company.

When to Use Hard Money Loans

Hard money loans are typically best suited for deals that involve properties and real estate. Almost all hard money loans use some type of real estate as collateral. However, they may sometimes be backed with other hard assets.

The loans can ideally be used:

• If the borrower possesses a less-than-perfect credit score (hard money lenders focus on the value of the property rather than on the borrower’s credit score)
• When financing for a project is needed immediately, hard money lenders deliver loan funds substantially faster than traditional lenders usually do)
• When an individual or group plans to purchase a property, fix it up, and flip it immediately, if the borrower expects to be able to pay back the loan in a short period of time, the higher interest rate charged by hard money lenders does not present as much of a problem.

How to Determine Hard Money Loan Amounts

The hard money lender determines how much they can offer to a borrower by using the Loan to Value (LTV) ratio. The LTV metric is calculated as the total loan amount divided by the value of the property used to back the loan.

The LTV ratio is important to investors/lenders because it helps them numerically express the strength of the loan. Hard money lenders typically offer a loan amount that is 65% to 75% of the collateral asset’s value. Therefore, if the loan is a mortgage loan, the borrower is asked to put up a down payment of 25% to 35%.

Using conservative loan-to-value ratios enables hard money lenders to rest fairly well assured that if they need to foreclose the property, they should be able to quickly resell it for a profit – that is, for considerably more than they loaned against it.

Pros of Hard Money Loans

• They can be closed quickly than traditional loans due to collateral.
• They are flexible and do not use an underwriting process.
• Financial position is not the primary concern.
• Payment is not emphasized because the borrower provides collateral.
• The lender may benefit from default if the collateral is substantial.

Cons of Hard Money Loans

• They come with a lower loan-to-value ratio because of real property protection.
• They charge higher interest rates.
• The lender faces considerable risk.
• The lender may not provide financing for owner-occupied residences because of property rules and regulations.

Examples of Hard Money Loan Borrowers

Hard money loans are typically best suited for deals that involve properties and real estate. Almost all hard money loans use some type of real estate as collateral. However, they may sometimes be backed with other hard assets. The real appeal of such loans for a borrower is that they can be a source of financing when traditional loans aren’t available or when the borrower needs to secure financing quickly.

In most cases, hard money loans are used by property flippers to fund potential projects. In addition, hard money loans can be given for a variety of different reasons.

1. Wholesale Funding

Since hard money loans can be obtained quickly, they are used for wholesale flips. Wholesale funding is beneficial because it can be used instead of contract assignments and does not allow the buyer and seller to know your financial spread.

2. Property Flippers

As mentioned, property flippers seek hard money loans to fund their future projects and provide the project as collateral. In addition, the loan amount is generally based on 90% of the purchase price plus 100% of the repair costs.

3. Renovate and Rent

Like property flippers, some individuals seek hard money loans for property projects intended to be rented after. Such types of acquisitions are funded in the same way as property flippers but are expected to be refinanced for a longer term once the actual project is completed. It is to ensure the best value for the property.

Hard Money vs. Soft Money

Here’s a quick look at the differences between hard money vs. soft money:

Additional Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Default Risk
• Non-Owner Occupied
• Quality of Collateral
• Secured vs. Unsecured Loans
• See all commercial lending resources