Hard money is a form of private financing most people know very little about. Hard money lending is commonplace in the business world. It is also the primary means of funding by which real estate investors obtain new properties. But to the average consumer, hard money remains a mystery.
It is easy to explain hard money as being lent by a private lender. But such a simple explanation doesn’t do it justice. Indeed, there are private lenders who do not make hard money loans. To figure it all out, you need to know the top five characteristics that distinguish hard money loans from all other types of financing.
1. It is Private Money
The first distinguishing characteristic of hard money is that it is private. What does that mean? Banks loan money obtained from two sources: customer deposits and borrowing from the Federal Reserve system. Credit unions lend in pretty much the same way. Hard money lenders do things differently.
Hard money lenders do not accept customer deposits. They do not borrow from the Fed. All money loaned by a hard money lender belongs to that lender. Hard money firms are often composed of multiple investors who pool their money together.
2. Funding Is Faster
Hard money loans are funded much more quickly than bank and credit union loans. Lenders do not have to go through the same long, drawn-out approval process their retail counterparts are known for. As a result, loans can generally be funded in a matter of days. Actium Partners, a hard money lender based in Salt Lake City, UT, has been known to fund loans in as little as 24 hours.
3. Loans Are Asset-Based
Speaking of bank and credit union approval processes, they take so long because lenders need to dig deeply into a borrower’s credit history and current finances to determine creditworthiness. This is not an issue for hard money lenders because what they do is based on assets.
Applying for a hard money loan requires offering some sort of asset as collateral. In almost every case, the asset is being acquired through the loan itself. Lenders are concerned about the value of that asset. If it has enough value to cover the amount being borrowed, approval is usually just a formality.
4. Higher Down Payments Are Required
Hard money lenders work on loan-to-value (LTV) ratios just as banks and credit unions do. Their ratios are typically lower, meaning borrowers need to bring higher down payments to the table. Down payments of 50% are not unheard of. A typical LTV in the hard money sector is between 60% and 75%.
5. Terms Are Shorter
Rounding out the top five characteristics of hard money loans are the shorter terms that accompany these loans. Very rarely will a hard money lender make a loan with a term in excess of three years. Three years is about the maximum. Most of the time, lenders try to keep terms at one year or less. To say that hard money loans are short-term loans is to state the obvious.
By contrast, home mortgages can run as long as 30 years. Car loans are longer today than they ever have been in the past, with some going as long as 7 years. Not so for hard money. One to three years is all you are going to get.
Hard money lending is a unique form of lending targeting a unique type of borrower. It is an excellent tool for investing in real estate, covering short term business expenses, expanding a business, etc. It’s not a viable option for financing typical consumer needs.