What’s A Hard Money Lender?
What’s a Hard Money Lender?
A hard money lender is an individual or company which lends money – usually on a short-term basis at interest rates much higher than traditional financing.
Unlike traditional financing with a bank, the terms of a hard money loan are based on the value of the property being used as collateral and not the creditworthiness of the purchaser/borrower.
Where do Hard Money Lenders come in?
Hard money lenders may make sense in the early days of real estate investing using the BRRRR method because they can make money available to purchase a property MUCH faster than a bank and without the lengthy underwriting process. Once an investor saves up enough cash or equity, they will often switch to more traditional financing methods.
Flippers often use hard money lenders because their intention is to only hold the property – and therefore the loan – for a short period of time. When the flipper sells the house – they pay off the hard money lender and themselves. The risk to flippers is rapidly growing loan payments if the house sits on the market.
When not to use a hard money lender?
You don’t want to work with a hard money lender for a long-term loan. Their rates can be astronomical compared to traditional financing methods. If you are considering working with a hard money lender due to a personal credit problem, I would reconsider. You’d be better off trying to save more money to increase your down payment and resolve your credit issue.
If you are considering using a hard money lender to finance a future investment, get the loan agreement reviewed by an experienced real estate attorney.
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