A hard money loan is a short-term loan secured by real estate. Investors use them when they need to close quickly, or when a traditional mortgage isn’t available because of credit issues or income that’s hard to document. You may also hear these called bridge loans.
Hard money can put funds in your hands in a fraction of the time a mortgage takes, and it can make a purchase possible after a bank has said no. It also has real drawbacks. This guide covers both.
How does a hard money loan work?
A traditional mortgage is approved mainly on the borrower’s creditworthiness. A hard money loan is approved mainly on the property. Your credit score may be considered, but the loan is secured by the real estate, and the equity in that property is what the lender relies on.
Hard money loans come from private lenders and individual investors, not from traditional banks. A few other things set them apart:
- Speed. An application can be processed in days or weeks, compared with weeks or months for a mortgage.
- Down payment. You’ll typically need to put more money down than with a conventional loan.
- Cost. Interest rates and fees are higher.
- Term. The repayment period is much shorter. Some loans call for interest-only payments followed by a balloon payment at the end.
Who should consider a hard money loan?
Hard money tends to suit a few kinds of borrowers:
- Investors who plan to flip. If you’re buying a property to renovate and resell, a short-term loan matches the length of the project. See our fix and flip loans.
- Buyers competing for a property. Being able to close quickly makes your offer stronger than one that depends on bank financing.
- Self-employed borrowers. If your income is real but hard to document the way a bank wants, an asset-based loan may be the more practical route.
- Borrowers with lower credit scores. A low score may rule out a conventional mortgage without ruling out a loan secured by solid collateral.
The drawbacks
The higher cost is the obvious one. The shorter term matters just as much. You need a realistic plan to repay, usually by selling the property or refinancing into long-term financing. If the project runs late or the market shifts, a short deadline leaves less room to adjust.
Before you borrow, be sure the deal still works after interest, fees and a reasonable cushion for delays.
Is a hard money loan right for you?
If a traditional lender has turned you down, or you need short-term financing for a property you plan to renovate and sell, hard money may be the best fit. To compare your options, read hard money vs. private money vs. mortgage loans and the four benefits of hard money loans.
Sachem Lending may be able to help even if you’ve been turned down elsewhere. Read our FAQs, contact us with questions, or apply online.
