A good lender is one of the greatest assets a real estate investor can have.
Hard money lenders take a different approach: they lend based on collateral securing the loan, and they are less concerned about your ability to repay.
If anything goes wrong and you can’t repay, hard money lenders plan to get their money back by taking the collateral and selling it.
However, some transactions do not meet the criteria of traditional lenders.
It does not mean that you cannot finance the property; it just means that you may have to look for other types of loans.
Here you will get a detailed explanation of hard money loans before we hit the list of top hard money lenders.
The truth lies that the majority of hard money lenders out there do require a down payment. They’ll take a look at your credit score, experience, and maybe a few other factors, and then calculate your down payment from there.
Most often, you’ll be required to front 20% to 30% of the deal.
Hence, you should have a thorough understanding of what hard money loans are and when to use them before you commit to this real estate financing option.
The table of content below will help you navigate this article easily.
Table of contents
What is Hard Money Lending?
Many investors looking for alternative financing that does not involve their local bank may have heard the term “hard money.”
They could even have asked a simple follow-up question: what is a hard money lending?
It’s called “hard money lending” because it’s harder to gain and pay back than its soft money counterpart.
Rather than looking at your credit score, hard money lenders decide whether to lend you money based on the property for which the funds will be used.
Hard money loans are short-term loans got from private investors or individuals, on terms that can be stricter than traditional loans.
What is a Hard Money Loan?
A hard money loan is a type of home loan issued by a private lender for property that is not owner-occupied.
Hard money loans are generally short term, between six and 36 months, and have a higher interest rate than traditional bank loans.
Hard money loans are approved based on the value of the real estate rather than the creditworthiness of the borrower.
These loans are often used because they have an exceptionally fast approval time.
Hard money loans often close within two to four weeks.
Check Out: 13 Ways to Make Money in Real Estate with no Money in 2022
How Do Hard Money Loans Work?
Hard money loans are a way of borrowing using purchased property as collateral.
Since traditional mortgage lenders are concerned about your credit scores, financial history, and overall ability to repay them, the loan application and approval process can be long and tedious to assess your credit worthiness.
This is not the case with a hard money loan.
Borrowers can access cash quickly because hard-money lenders are careless about their personal finances and credit scores and instead focus on property values.
Since the property is used as collateral, if you default on the loan, the borrower will take the property and sell it to get his money back.
Hard money loans can be approved and financed in a matter of days. The term of the loan can last from a few months to several years.
Although it rarely makes financial sense to maintain a strong money loan for that long, since its interest rates are usually high compared to alternatives such as a conventional mortgage.
Hard money lenders make regular monthly payments on their loan, including interest and related fees.
Borrowers can sometimes request refunds from their lending partner for particular property rehabilitation projects if that is part of their agreement.
Once the property is sold, the borrower repays the lender the remainder of the loan, covers the closing costs, and keeps the remaining funds from the sale as profit.
When To Use Hard Money For Real Estate
Although hard money lenders often make loans for almost any property, certain real estate investments have been made with hard money.
Rehabilitation projects, construction loans, and land loans have been carried out to be financed with hard money.
This does not mean that other types of investments should not be financed with hard money.
If you, the home buyer, have credit problems or need to act quickly on a transaction before it disappears, the speed and convenience of a hard money loan may pay off.
What Types of Real Estate Do Hard Money Lenders Finance?
While a hard money lender can lend on any type of non-owner-occupied real estate, they generally look for situations with a fairly quick exit strategy to know that they will be paid at the end of the loan term.
Rentals
Hard money lenders will also provide short-term loans for residential real estate investment properties.
The goal here is generally to refinance the property in 12 to 36 months to pay off the hard money loan.
Investors can turn to a cash loan for a rental property if they need to be able to close the deal quickly and don’t have time to go to a bank.
They may also need a private loan if the rental property needs repairs before a bank will finance the transaction.
Commercial Real Estate
A common situation with commercial real estate is that an investor has a tenant to rent a space but not a property to put it in.
The investor will find a vacant property that the tenant will rent but must first purchase the property and prepare it for the tenant.
A bank may not want to finance a vacant property intended to be used as an investment if the borrower does not have the necessary assets to guarantee the loan.
A big money loan can be helpful in this situation to close the deal, and make improvements to the tenant and rent.
Once the tenant is in place and paying the rent, a bank will be more willing to finance real estate.
Fix-and-Flip Properties
Hard money loans are very common with “fix and flip” properties.
Many lenders will even finance the repairs. These transactions are ideal for the lender, as changes are generally completed within six months.
If the lender also finances the repairs, it will calculate the cost of the repairs and issue raffles, as the borrower needs them to pay for work in progress.
This ensures that the funds are used for repairs and limits the lender’s exposure as they only distribute portions at a time.
Many hard-money lenders even prefer to finance repairs to know the project will be completed.
If the borrower is successful in demolition and runs out of money, the value may fall below the purchase price.
When financing the project, they do not have to worry that the borrower will not be able to complete the work due to a lack of funds.
Multifamily
Like rental property loans, investors can quickly need capital to close a multi-family property when there is insufficient time to go through the traditional loan process.
An investor can also buy a multi-family property with few or no tenants that need a lot of repairs.
This type of property would be difficult to finance from a bank so that you can look for a big money loan.
They can do the necessary work and lease the property before refinancing it with a long-term loan.
Finding a Hard Money Lender to Work With
There are many ways to find a reputable hard money lender.
An easy way to find a local hard money lender is to Google [your area] + “hard money lenders.” There will be individual companies in the search results and lists of hard money lenders compiled by others.
This will provide a good number of lenders to start contacting and evaluating.
Another way to find a strong money lender is to attend the meeting of your local real estate investor’s club.
These club meetings exist in most cities and are generally attended by lenders looking to network with potential borrowers.
If there is no hard money lender present at the meeting, ask other real estate investors if they have a hard money lender they can recommend.
Real estate brokers, conventional mortgage brokers, and other real estate professionals can recommend an experienced lender.
Take advantage of your existing network and see which is most recommended.
With these few lenders on the list, it’s time to contact them and find the most suitable lender to finance your next transaction.
10 Best Hard Money Lenders and How they Work in 2023
If you’ve decided that hard money lending is right for your current situation, finding the right lender can be a challenge.
These are some of what we consider good options for hard money lenders.
These hard money lenders have the best reputation in the industry.
They are on an equal footing with other lenders in the industry and have proven capable of closing deals quickly without changing their terms at the last minute.
Also, the companies listed below provide services nationwide.
Other small lenders, like North Coast Financial in California, exclusively serve regional investors.
Review loan amounts, interest rates, terms, minimum credit scores, and closing times from our top ten hard money lenders.
#1. Patch of Land
Patch of Land is a real estate crowdfunding website that connects borrowers and lenders.
Interest rates are relatively low and the demand for financing is very fast.
Additionally, Patch of Land has a dedicated customer service team that guides applicants through their startup and is very responsive to investor questions and needs.
#2. RCN Capital
RCN Capital is a nationwide lender offering hard money loans for repairs, rental, and multi-family properties.
They also offer long-term rental financing, which hard-money borrowers can qualify for at the end of their loan term.
SEE ALSO: What Is The Home Owners Loan Corporation? How It Works
#3. CoreVest
CoreVest offers a wide range of credit products.
In addition to bridge loans for fixed and reverse solutions, they offer lines of credit, long-term financing for leases, rental portfolio loans, construction loans, and multi-family loans.
#4. Finance of America
Finance of America has very competitive interest rates for residential and commercial properties.
Additionally, it will provide established investors with a line of credit of up to $10 million, so they can work on large projects or multiple properties at once instead of using other options like cash refinance or a business loan.
Rather than looking at a borrower’s personal credit history during the application process, Finance of America investigates their real estate investment history, which might not be a good fit for a new investor.
#5. Lima One Capital
Lima One Capital offers several loan options in addition to hard money loans.
They also have options for long-term rental loans and multi-family loans.
#6. Visio Lendng
Visio Lendng offers a portfolio of long-term loan and bridging options for rental properties.
These loans are ideal for people who want to invest in vacation properties or multi-unit buildings.
Visio Lending’s interest rates are attractive. The company doesn’t rate borrowers based on personal income or credit score, so less-than-perfect credit is not a barrier to entry for real estate investing.
SEE ALSO: Top 21 Crowdfunding Platforms For All Countries in 2023
#7. Groundfloor
Groundfloor is a crowdfunding lender for short-term loans.
Meanwhile, Groundfloor funds the deals they approve themselves and then places the loan on their platform for investors to fund and pay for Groundfloor.
#8. Source Capital
Since its inception in 2007, Source Capital has financed hundreds of millions of dollars in residential loans.
They work with all types of borrowers and understand even the most complex scenarios.
In most cases, Source Capital is faster and more profitable than the competition.
Whether buying or refinancing a condo, single-family residence, duplex, triplex or quad, they can help you finance your home loan.
#9. LendingHome
LendingHome is one of the best-known hard money lenders in the industry. They also offer long-term home loans.
Also, LendingHome has the ability for accredited investors to invest in their loans for passive income.
#10. North Coast Financial in California
North Coast Financial is one of California’s most experienced direct money lenders, with more than 38 years of experience in hard money lending.
California real estate investors and owners trust North Coast Financial for fast financing and approvals, competitive rates and fees, flexible loan criteria, and excellent service.
Hard money investment property loans can be financed in 5 days.
They provide first-and second-hard money loans and lend to many borrowers, including individuals, entities (LLC, partnerships, corporations), trusts, and estates.
Contact North Coast Financial now for a free consultation.
Final Insight
Hard money loans can be a great tool for real estate investors to acquire properties in specific situations.
However, they should not be used instead of traditional financing when available.
If you choose to finance a transaction with hard money, make sure that you will be able to pay the interest and fees and that you will be able to repay the loan when it is due.
Also, if a hard money loan is right for your situation, check out the companies on our list of the best hard money lenders.
References
- fool.com – 5 Best Hard Money Lenders
- nav.com – The Best Hard Money Lenders and How To Get a Hard Money Loan
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