Hard Money is technically defined as “a conservative loan made against hard assets.” A “Hard Money” loan (also referred to as an “Equity-Based Loan,” “Private Money,” “Special Circumstances Financing,” or a “Bridge Loan”) is a loan that is offered when a conventional loan may not fit the borrower’s lending needs. This generally happens when a borrower needs money to act on a “hot” real estate deal, but does not have time to wait for the stringent and sometimes lengthy underwriting process associated with a conventional loan.
These loans are typically “outside of the box” type deals and require creative financing to help real estate investors fund projects where conventional financing may not be right for the circumstances. Hard money loans are typically fast, flexible, and can go as high as 65% loan-to-value based on the after-repaired-value (ARV). For example, if a house will be worth $100,000.00 after a complete rehab, a hard money lender will usually lend up to $65,000.00 total. Thus, if you can purchase the property for $40,000.00, not only could you get the acquisition money, but also the $25,000.00 construction money.
The capital for a Hard money loan is generally acquired from private individuals or small companies willing to lend out money for these types of creative deals. Most banks and other financial institutions do not fund hard money loans. Hard money can be utilized in both residential and commercial real estate transactions. Interest rates and points are usually higher with a hard money loan than a standard conventional loan, because the risk of default is deemed to be higher with these types of loans. However, if the real estate deal is structured properly, those higher costs can easily be absorbed into the deal, making the transaction a win-win for both the borrower and the lender. Interest rates paid by borrowers for hard money loans typically range from 12-18% annually. The exact rate will depend on many factors, including the deal type, the borrower’s strength, and the current supply of private money available at any given time.