What Is A Hard Money Lender?
A hard money lender is a private individual or company that offers short-term, asset-based loans at high interest rates, primarily for real estate investments or projects. These lenders prioritize the collateral value of the property over the borrower's creditworthiness, resulting in faster approvals and funding compared to traditional banks.
Unlike traditional loans, which rely heavily on credit history and income, hard money loans focus primarily on the collateral value for approval. Conventional lenders seek borrowers with a solid repayment history, as it indicates their ability to meet loan obligations.
Although a borrower may have an excellent credit score and considerable income, traditional loan approvals are not guaranteed and can be a lengthy process. In contrast, hard money lenders emphasize collateral, giving less weight to credit history. While not suitable for everyone, hard money loans can be advantageous in specific situations that require a swift, collateral-based financing solution.
Strategies Using Hard Money
There are different instances when a real estate investor will be more likely to use a hard money loan versus a traditional loan. Real estate investors might find themselves using a hard money loan in the following instances.
Fix & Flip
- Independent appraisers AVR
- In-house AVR
- Percentage of total costs
- Percentage of the purchase price of the property
Short Term Financing
Questions To Ask A Hard Money Lender
Based on the best practice of reaching out to multiple lenders, you will want to make sure you have a proper list of questions available to you to vet out which lender is best for you. Here are some questions that you should ask a potential lender:
- Are you the actual lender or just a broker?
- Do you check personal credit? What score are you looking for?
- What project details and documents do you need to make a quote?
- How long will it take to get a quote?
- Where does your money come from? Is this money in your control or do you receive it from a third party?
- What happens if my loan needs to be extended?
- How do you handle interest? Is it upfront, monthly or at the end?
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