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What Is A Hard Money Loan?
Hard money loans, also known as bridge loans, are short-term loans made to real estate investors to finance real estate projects. Real estate is considered a hard asset, thus the term hard money was established. The most popular type of hard money loan is the Fix and Flip loan which is also called a Rehab Loan. The borrower uses this loan to purchase a property, renovate it and resell it for a profit.
Though this is a very popular use for hard money, investors take advantage of these loans for other projects as well. Hard money loans are favored over conventional loans as they offer less stringent qualifying and can close quickly. Quick access to funds is an important asset to any real estate investor. Hard money lenders will look at a borrower’s credit report when considering their loan application, but the credit history is not the deciding factor for approval.
Instead, the lenders main focus is on the property being purchased. Hard money lenders, mainly, base their decisions on the property’s value rather than its current market price. They do this by considering the property’s after-repair value (ARM), which is an estimate of the property’s value once the remodeling stage has been completed. This makes hard money lenders asset based lenders.
Approvals can typically be given without reviewing the borrower’s tax returns or other income statements to verify income. Hard money lenders can be direct lenders or they can be lending brokers. Funds from these loans can be used for residential and commercial property. Though the typical loan term for a hard money loan is 12-24 months, some lenders offer more flexible terms depending on the type of loan.
Many use the terms hard money lender and private money interchangeably. This is widely acceptable in the industry. Though they share some commonalities, there is a slight difference. The difference is that private lenders are private citizens and they not only lend on real estate, they can issue personal loans. Hard money lenders do not issue personal loans, they only lend money on hard assets.
