What Makes Hard Money
By Michael Main
Most Hard Money Loans Are Investment Loans
There is a common misconception that hard money loans are expensive, charging high interest, and hurting homeowners. However, this is largely inaccurate. Very few hard money lenders loan to homeowners and those that do have to comply with all the federal requirements ensuring consumers are able to pay such a loan back, before extending the loan to the borrower. The Consumer Finance Protection Bureau promulgates rules governing loans to the home-owning consumer. Most hard money loans are actually commercial or investment loans, however, and not consumer loans.
As a commercial tool, hard money loans are a relatively inexpensive source of funds and a key tool in the real estate business. There are several things that serve to make hard money loans inexpensive for commercial borrowers or real estate investors. Foremost among these, is that the short term interest-only loans, maintaining relatively low monthly payments. Furthermore, they offer a more streamlined and efficient closing process with fewer costs. And finally, they allow borrowers to take quick advantage of opportunities as they become available.
The short term, interest-only nature of hard money loans makes them a perfect financing tool for commercial borrowers. When a company or investor does not need long term financing, a hard money loan fits this niche well. Hard money loans are amortized no differently than traditional mortgages. The interest rate is calculated annually and paid monthly. Where a traditional mortgage includes both principal and interest in the loan, a hard money loan typically includes only interest. This keeps the monthly payments low, while the borrower works to fix, sell, or seek long term financing for their real estate. The balance is due at the end of the loan term and is typically covered by a new long term mortgage or sale of the now renovated property.
The closing process for commercial hard money loans is a more efficient process than traditional mortgages. Costs associated with traditional mortgages can include application fees, credit report fees, inspection fees, appraisal, and survey fees. Hard money loans rarely include all these costs. Here at Larry the Lender, for example, we do not charge an application fee, pull borrower credit, or require inspections. We only require an appraisal when we are unable to determine a property value on our own or are unfamiliar with the area in which the property lies. Existing surveys are typically sufficient for our needs, and we rarely require a new survey. By eliminating the need for most of these items, both actual costs to the borrower, and substantial time, are saved. Since it is commercial lending, disclosure review time frames associated with owner-occupied properties do not apply either. All these things serve to save the commercial borrower both time and money in the closing process. Where traditional mortgages often take one to two months from start to finish, hard money loans often take less than a week to complete.
Finally, probably most important for the commercial borrower, is opportunity cost. For the real estate investor looking to fix and flip a property, or purchase an investment house, it is often necessary to move fast. Purchasing properties from tax auctions, short sales, or sellers that need to close quickly requires fast access to money, to acquire the property. The large commercial borrower, looking to purchase a building or develop raw land is often in the same position, needing funds quickly, and upfront, to make the opportunities they are looking at happen. This is where hard money loans really shine. These loans are designed to provide fast, short term real estate loans that allow commercial borrowers to take advantage of any opportunities now, and to make their long-term plans for their financing needs afterward.
Hard money loans do turn out to be an inexpensive funding method. They maintain low monthly payments by being interest-only loans. They save commercial borrowers money and time based on their closing requirements. They allow borrowers to move quickly rather than missing an opportunity to expand or improve their business. Rather than being an expensive alternative to traditional mortgages, hard money loans are an invaluable tool to the commercial borrower.