What is Hard Money?

Although hard money may mean a number of different things, in the context of real estate it is financing used for special circumstances when a conventional bank loan doesn’t fit the borrower’s needs. The primary difference between a hard money loan and a conventional loan is that a conventional banker typically takes a long time to evaluate the borrower’s personal creditworthiness while a hard money lender can put together a deal much more quickly, basing his or her decision on the value and collateral of the property which will secure the loan.

If you decide to use a hard money loan, you need to be aware that the interest rate will be higher than that of a conventional loan, and you will likely pay more points at closing. However, if the speed of getting your loan is important, it may be worthwhile to check into hard money.

For example, suppose you were to bid on a property at auction and won the auction for $50,000. The auctioneer might require $5,000 down and closing within two weeks. The property itself may be worth $80,000, so you don’t want to lose out on this great deal. You know you have over $5,000 in your savings account, so the down payment is not a problem. However, you have no idea how you will come up with the additional money needed for the closing that is just 14 days away. Perhaps your credit score is less than perfect. You remember when you bought your current residence, it took about two months to get the financing approved.

This would be a perfect time to consider a hard money loan. The lender likes the deal because he or she is securing a $45,000 loan with an $80,000 property and is receiving a high rate of return on the loan. You benefit by getting your money quickly, even though you wouldn’t qualify for a loan from a conventional banker. In fact, you may even be able to get the loan for enough money to allow you to rehab the house and sell it for a profit, paying back the high interest, hard money loan.

Hard money is often used for investment properties, foreclosure bail-outs, land acquisition and development, short-term properties that will be “flipped”, and any transactions that cannot be completed through conventional financing channels. Because the loan is typically paid off rather quickly, the cost of the money is not important. Rather, the advantage of hard money is its quick availability in the face of a less than perfect credit background.

Hard Money Bankers