For some borrowers, the term “hard money lender” conjures up images of scary thugs threatening physical violence if loans aren’t repaid on time. However, such notions are completely off-base. Hard money lenders, also known as private capital lenders, are professionals who fill a legitimate niche in the real estate lending market by providing short-term, real-estate-secured loans with fast turnaround times.

Defining a Hard Money Lender

Hard money and private capital lenders can be a single individual investing his or her own money or a group of investors pooling their money together in order to fund larger investments. Additionally, some private capital lenders such as Montegra manage funds in which select accredited investors can choose to invest. Unlike banks, who lend money that has been deposited with them for safe-keeping, these funds are invested with the express purpose of being used to underwrite projects that are expected to return a profit through the repayment of the loan.

Benefits of Hard Money Loans

Hard money loans get a bad rap for their high interest rates, but these are the trade-off for the increased risk that the private lender takes on by financing loans that would typically be rejected by conventional lenders. The increased cost of a hard money loan can also be cancelled out by the money that can be made or saved through the quick closing times offered and reduced red tape and paperwork required. Hard money lenders generally fund loans in a matter of days or weeks rather than the months that getting approval from a bank can take. This is especially helpful for investors, flippers, and builders, all of whom need cash fast but don’t necessarily want to hold on to the property as a long-term investment.

Hard Money Loan Terms

Hard money loans have different terms than conventional mortgages. As mentioned above, these are typically short-term loans, spanning six months to a year with the possibility of extending the loan for another year or more as the situation warrants. The interest rates for these loans are higher, generally ranging from 9 to 12 percent. Most private lenders also charge points (where 1 point equals 1 percent of the loan amount) at closing; two to four points is average for hard money loans. The other major difference with hard money loans is that the down payments can be much larger, depending on the value of the property and whether or not you plan on improving it. Private lenders usually cap their LTV (loan-to-value) rate at 60 to 65 percent of the property’s value. It is important to note that this does not necessarily mean that the borrower is on the hook for the other 35 to 40percent, because the lender will almost always use the higher of the purchase price or the property value, rather than the lower of the two as bank lenders must. However, private lenders do like to know that the borrower will have some skin in the game as reassurance that they intend to pay back the loan.

The Risks

It’s important to remember that hard money is not the best option for every real estate deal, but just one financing tool in a toolbox of financing options. Also, you should check into any potential lenders before deciding to borrow from them to make sure that they are legitimate lenders and not brokers masquerading as lenders or fee-collecting scams (see our blogs on researching lenders and spotting scams for more information). Reputable private capital and hard money lenders will happily provide you with references upon request. If a lender seems unwilling to do so, that should be an immediate red flag.

If you have a project in need of private capital financing, contact Montegra at 303-377-4181 to discuss your loan request and find out more about our hard money lending programs.