Hard money lending is considered an alternative form of lending appropriate for needs that traditional lenders will not fund. Hard money is typically utilized by real estate investors, entrepreneurs, and business owners. That said, the vast majority of loans made throughout the hard money industry cover property acquisitions.
Hard money and its cousin, bridge lending, are so unique that they are intended only for certain types of needs. You wouldn’t go get a hard money loan to buy a new car. You would not take out a bridge loan to cover that European vacation you have always wanted to take. If you’re not sure why, here are five key characteristics that set hard money apart:
1. Extremely Short Terms
Hard money and bridge loans are known for their extremely short terms. At Actium Partners in Salt Lake City, Utah, they like to keep loans at 24 months or less. Terms of 6-12 months are even better.
Some lenders will go as high as 36 months when conditions warrant. But anything longer than that is extremely rare in hard money. The reasoning is simple: hard money loans are riskier by nature. Lenders are not interested in tying up their money in high-risk projects for long periods of time. They want to get in and out quickly.
2. Higher Interest Rates
Compared to traditional loans, hard money and bridge loans come with higher interest rates. It’s not unusual to see double digit rates on some loans. However, the higher rates are not as bad as you might think. Why? Because loan terms play a huge role in the total amount of interest paid over the life of a loan.
Paying 10% on a 24-month loan could mean fairly high monthly payments. But in the end, you are likely to pay less total interest than you would on a 15-year loan at 7%.
3. Approvals Based on Asset Value
Hard money loans differ from their traditional counterparts in terms of approval. In a traditional setting, approval is based on the borrower’s demonstrated ability to repay. That’s why traditional lenders leave no stone unturned in their investigation of a borrower’s credit and income.
Approval of a hard money loan is based almost exclusively on the value of the asset being obtained. If you are purchasing a piece of property, that property needs to have enough value to cover the loan and its associated costs. You will be approved if it does.
4. A Simpler Underwriting Process
Because hard money lending is asset-based, the underwriting process is a lot simpler. Documentation requirements are minimal. Time commitments are shorter. Borrowers are not forced to jump through hoops just to get an answer. In fact, underwriting is so simple that Actium Partners has been known to get from approval to funding in as little as one business day.
5. Funding Is Fast
The previous point leads directly into the fifth key characteristic of hard money and bridge loans: funding is fast. Once a hard money loan is approved, it doesn’t take months to get to closing. The previously mentioned Actium loan was approved on a Friday afternoon (the application didn’t come in until that morning) and was funded on Monday morning. Hard money can be that quick when it needs to be.
It should be clear that hard money and traditional lending could not be more different. That’s a good thing. While there are needs that are more appropriate to traditional lending, hard money and bridge loans can accomplish things that traditional lending cannot. There is plenty of room for both types of lending in the modern marketplace.
