What is a hard money lender?
What is a hard money lender?
What is a hard money lender? Simply put, a hard money lender is a lender that makes a loan secured by real estate. That may sound similar to loans that banks or traditional mortgage lenders make. However, there is a definite distinction between the two. Hard money lenders use private investors to fund their deal, banks use deposits. As a result, hard money lenders are not regulated like banks, which allows them to get rid of all the red tape. This gives hard money lenders the ability to make quick decisions and close in days, not several weeks. On the flip side, private money requires a higher rate of return than what banks pay depositors, so hard money lenders charge higher interest rates. Finally, hard money lenders focus mostly on the value of their collateral (real estate) and borrower’s experience, not the financial condition of the borrower like banks do.
To understand “what is a hard money lender,” you need to know why a borrower would want a hard money loan.
It used to be that hard money lenders were the “last resort” for obtaining a loan. Those days are over as hard money lending has really flourished over the last decade. Nowadays, hard money loans are being used by active real estate investors looking for funding for a fix and flip, build a spec house, or purchase an investment property. Following the financial crisis, hard money loans grew in popularity because they were one of the only financing options for investors looking to buy foreclosures. Ironically, the sellers of these foreclosure properties were banks. Banks required buyers to close quickly. That meant you either needed to be a cash buyer, or have hard money loan financing in place in order to win the deal.
I don’t mean to suggest that hard money lenders only fund fix and flips etc. There is still a place in the market for hard money lenders that will fund borrowers with poor credit, bankruptcies, or foreclosures. The borrower will pay a much higher interest rate, but at least they have the ability to transact.
There is no doubt in my mind that the term hard money comes with a stigma.
I find myself defending my profession and answering what is a hard money lender at least twice a week. It is a common misconception that hard money lenders are sleezy and looking to take advantage of borrowers. Sure, there are what I call “vulture lenders” out there that are waiting for a default so they can foreclose on you. That’s rarer these days, but they do exist. That’s partly why hard money lenders can only lend to investors and not consumers. Government protects consumers from being taken advantage of. They assume the general consumer isn’t as well versed as investors are when it comes to risk and I agree. However, in the end hard money lenders are asset-based lenders. They know they can always rely on the value of their underlying collateral to repay their loan if a borrower can’t. Just like banks, hard money lenders have every right to foreclose and sell the property in order to repay its debt. Banks didn’t hesitate to foreclose during the financial crisis. Hard money lenders are no different if they can’t work out the loan with a borrower.
Hard money lenders come in all different shapes and sizes.
It’s not always a simple answer for me when I’m asked what is a hard money lender. A hard money lender can be an individual lending their own money. I know dentists and doctors that have $5,000,000 in loans out to different real estate investors. It’s more common to see small mortgage shops lending hard money that are funded by a group of investors. In the last 10 years we’ve seen wall street step into this business and the emergence of national hard money lenders. As a result of all the competition, rates have dropped dramatically. It used to be that 12% was the normal hard money loan interest rate. Now we’re seeing rates as low as 8% on 12-month bridge loans, and we’re even starting to make 30-year fixed rate hard money loans at 4% rates.
Now that you know “what is a hard money lender,” you will be tempted to start searching for one. As with anything, you should use caution and make sure you do your due diligence. Make sure you take the time to look into the reputation of the hard money lender. Find out if they are a direct hard money lender that lends their own money. That matters because direct hard money lenders make their own decisions because they are lending their own money. Direct hard money lenders can move quicker as a result and as a borrower you know exactly who you are dealing with. Lenders that aren’t direct rely on funding from other sources to do business, which can complicate thing for borrowers.
Remember that hard money loans are not without risk. No investment or loan in general is without risk. You can now answer what is a hard money lender, but do your due diligence. Ask questions and get to know your new hard money lender relationship before you accept terms and move to a closing.