One of the most important things to understand about hard money is the phrasing. You’ll see a lot of terms being used interchangeably including private money lender and hard money lender. There’s technically a difference, as anyone with capital can be a private money lender. If your aunt lends you money to invest in real estate, she’s a private money lender. You and the private lender can have whatever terms you agree upon, it can be a written or verbal agreement, you could choose what kind of documentation or guarantee will be needed, etc. A hard money lender is more official and concrete with its terms, combining the flexibility of private money with the reliability and large capital reserve of a traditional financial institution. That said, a hard money lender is technically a private money lender, but not every private money lender is a hard money lender, so its good to understand the slight differences between the two.
So how does hard money lending work? It’s a much simpler process than you would expect, even more straightforward than working with a traditional financer in some cases. Hard money loans have a different set of criteria than FHA mortgages or bank loans. Hard money lenders look at a borrower’s recent experience level, their credit score, and their current liquidity. That’s it! Everything else surrounding the deal is based on the asset- does the work being done on the property make sense? Will that work result in a high enough sale point or fetch a high enough rent to be viable? Those are the kind of criteria hard money lenders use to determine whether they want to move forward on a deal or not.
There’s a reason that investors choose hard money lending for real estate projects, and a lot of it has to do with the speed of closing. A hard money loan works much faster than traditional loans, which is why real estate investors choose them for their deals. These types of loans work best for fix and flips or new construction: the real estate projects that require large amounts of capital to begin the project and fast loan closings in order to not miss out on the opportunity.
Real estate investors also prefer hard money lenders due to the flexibility in the loan’s underwriting. While direct lenders still require certain criteria that a large financial institution does, such as credit score and previous experience, plus there are set loan terms that the loan could fall under. However, the underwriting process is much looser and more done on a case-by-case basis. No two deals are the same, so no two loans are written the same. That’s the benefit of being a private hard money lender- we’re in direct control of our capital and therefore can provide more flexible loan options than big banks or financial institutions while remaining faster and just as reliable.
Too often we have investors and brokers asking us how does a hard money loan work, so hopefully we helped shed some light on the topic. As always, we recommend real estate investors do their research and contact several different lenders to find the right service for them. Its always better to have a few direct lines of capital you can pull from rather than putting all your investment eggs into one basket.
ABL is a direct hard money lender, offering hard money loans for fix and flips, new construction, and fixed term rental loans. Each of these loan options come with a variety of flexible loan programs that ensures our borrowers receive the best possible loan for their project and desired exit strategy. Contact us today to have your hard money loan approved in 24 hours or less by calling 201-474-3335 or emailing info@abl1.net.