Traditional lending helps borrowers have access to capital, albeit in a structured and slow manner—not exactly investment-friendly. Regardless of the purpose of your loan, you have to crawl through the system to acquire funds, and that limits the options to diversify your portfolio. If you want a real chance to add value to your finances, you have to think out of the box.
For those into growth-intensive borrowing, investing in hard money loans is one of the most promising and innovative solutions at your disposal. By “investing,” we mean taking out a hard money loan and laying out interest payments for a short period while simultaneously using the borrowed funds to generate more revenue or capital wealth in the long run. How does this work, and why can’t you do it with traditional loans?
This guide will help you understand the mechanics of hard money loans and figure out how to use them in various scenarios.
Are Hard Money Loans a Good Idea Compared to Traditional Loans?
Hard money lending is an asset-based funding tool that works like conventional loans minus the dreadful tentacles of bureaucracy. Banks, credit unions, and other traditional lending institutions aim to provide low-interest funding to citizens. Because these loans are government-backed, the lenders have to adhere to strict instructions to sanction only those projects that have a minimal level of risk.
Take any traditional loan package, commercial or personal—the lender is bound to ask for a ton of paperwork to check if you’re an eligible candidate for the loan, and the approval process can take up to three months! You can also be easily rejected on any of the following grounds:
- Inadequate credit score
- Faulty paperwork
- High debt-to-income (DTI) ratio
- Mistakes in application documents
- Unstable job (or being self-employed)
- Tax defaults
- High lending risk
Hard money loans fill the gap created by traditional lending drawbacks. The lenders operate within the private sector, free from pressing bureaucratic guidelines, so you can get loans with more speed, convenience, and leniency.
The primary component of a hard money loan is collateral, which enables lenders to extend their services to anyone regardless of their financial profile. The risk of default is completely backed by the collateral, so there’s less paperwork-based scrutiny, and the loan gets approved within days.
Source: Tima Miroshnichenko
Hard Money Lending Regulations and Terms
Hard money lenders don’t have to report to credit bureaus like banks have to, but they are usually bound by the regulations of the state they operate in. Some states have dedicated bye-laws and credit commissions to regulate private lenders. Federal laws that impact both traditional and hard money lenders include:
- Mortgage Reform and Anti-Predatory Lending Act (MRAPLA, also called the Dodd-Frank Act)
- Truth in Lending Act
- Real Estate Settlement Procedures Act (RESPA)
- Home Ownership and Equity Protection Act (HOEPA)
These regulations are put in place mostly to protect consumers, especially homeowners, from committing to exploitative loans.
Hard money loans come with higher interest rates due to the restriction-light processing and quick turnaround time. Here’s how they compare to conventional loans:
|Loan Component||Hard Money Loan||Conventional Loan|
|Tenure||1–3 years||Varies (up to 30 years)|
|Down payment requirement||Depends on the lender||Required|
|Funding time||5–15 days||30–90 days|
|Monthly payments||Interest only||Amortized (interest + principal)|
Hard Money Loan-Based Investing—The Basics
Hard money loans have a unique role in the investment market where prices fluctuate every day and time equals money. You may already be aware of how these loans are hot stuff in the real estate industry, popularized especially by property flippers.
Seasoned investors generally get quick short-term hard money loans to buy fixer-uppers. They renovate the property and sell it for enough proceeds to pay off the loan and keep a big profit—ultimately getting a decent ROI (return on investment) without bureaucratic hiccups. You cannot have the same speed and efficiency if you use traditional borrowing.
Besides real estate transactions, hard money loans can work for any investment scenario where time and convenience matter. If you think your revenue or ROI would take a nosedive because of funding delays, taking a hard money loan would be the productive alternative. For long-term projects, a traditional refinancing loan usually follows after the hard money loan so that the borrower can switch to the best available interest rates.
Source: RODNAE Productions
When Is Hard Money Borrowing a Good Investment?
The profitability parameters vary from business to business, but here are some common scenarios where hard money loans work well:
|Business acquisition||Strategic decisions like acquiring a business or buying partners out require immediate cash outflows based on the latest financial valuation of the company, so a hard money loan makes more sense than a traditional acquisition loan|
|Construction||Builders and contractors use hard money loans to complete construction at current raw material and labor costs and keep the project expenditure within budgeted estimates|
|Debt consolidation||Many hard money lenders offer debt consolidation loans that allow you to pay off multiple creditors at once and have a more comfortable repayment schedule|
|Short sales and foreclosures||Hard money lenders offer funding to people and business entities regardless of their current financial standing, which means borrowers facing capital losses due to a short sale or foreclosure situation can rely on a hard money loan to bail them out|
|Leveraging unencumbered assets||If you have one or more unencumbered assets on your balance sheet, you can use them to get a no-questions-asked hard money loan. It’s one of the quickest ways to raise capital without diving into a ton of documentation|
Outside the commercial scene, hard money borrowing is also a fantastic solution for consumer purposes. It can help you secure top housing and rental properties, stocks, and other investments quickly when prices are expected to rise.
How To Find a Good Private Investor/Lender for Hard Money Loans
Hard money lending is a service-based industry, so you cannot expect a uniform set of solutions from every lender. For example, certain hard money lenders only loan for commercial purposes, while others prefer to extend a package only if the collateral is real estate.
As a potential borrower, start evaluating the hard money lenders available in your state to find out who could facilitate your funding needs most adequately. You can search for them online or via your personal real estate network. The quality of services is usually reflected in the Google ratings and reviews for any lender, whether they have an online presence or not. Before you commit to a loan, it’s prudent to evaluate a lender on parameters like:
- Transparency (in case of communication, total cost commitment, etc.)
- Customer behavior
- Funding time
- Interest rates (compared to other lenders offering similar deals)
As a general rule, avoid lenders who do not ask questions about your collateral. The value of the collateral is what drives hard money lending, and if a lender isn’t interested in that, it indicates shady intentions and no ethical consideration toward the borrower.
Source: Theo Decker
Hard Money Loan (HML) Solutions—Offering the Fastest Hard Money Loans for Any Purpose!
Florida-based Hard Money Loan (HML) Solutions caters to borrowers from every background. The lending group is backed by some of the state’s top private investors and veteran entrepreneurs passionate about helping others grow with the timely disposal of funds. Whether you’re eyeing an exciting fix-and-flip deal or want to close your existing mortgage, reach out to HML Solutions to finance any investment. Their most sought-after packages include loans for:
- Construction and reconstruction
- Bridge funding
- Cash-out refinancing
- Business acquisition
- Foreclosed or REO (real estate-owned) properties
- Fix and flip
If you have a real estate deal, HML Solutions can support the funding of residential units, commercial properties, and even 1031 exchanges. The lenders are also open to other types of collateral, like precious jewels and original works of art. All applicants enjoy a fast approval process—candidates with no-hassle deals can get access to the funds as early as three days.
HML Solutions—Lending Philosophy, Interest Rates, and Terms
HML lenders adhere to the highest standards of ethical lending. Their loan consultancy and lending services adapt to a borrower’s needs. The analytical team at HML suggests borrowers tailored and manageable loan packages. While they don’t accept deals that would be difficult for the borrower to follow through, the lenders try their best to guide rejected applicants towards alternative borrowing methods, if applicable.
Check out what typical lending terms at HML Solutions look like:
|Components||HML Solutions Services|
|Minimum credit scores||Not required|
|Hard money lending funds||$100,000 to $50,000,000+|
|Installment type||Interest only (no amortization)|
|LTV (loan-to-value) offered||Up to 70% of the lower of:|
|Funding time||3–14 days|
|Origination fee||2 points or 2%|
|Paperwork||Basic property/collateral and business docs (bank and financial statements not required in most cases)|
What Clients Say About HML Solutions
HML Solutions (rated 5 stars on Google) has a long track record of satisfied customers. The lending team has a proactive and solution-centric approach—they don’t shy away from complicated deals and have funded several clients with immediate funding needs. HML Solutions prioritize enabling:
- A quick and transparent approval process
- Blunt, time-saving communications
- Judgment- and prejudice-free lending
- Unwavering funding commitment
- Long-term, mutually beneficial relationships with clients
Applying for an HML loan is easy—you need to:
- Fill out an online loan application form and wait for an agent to call you
- Discuss your funding requirements in clear terms
- Allow the HML team to appraise your collateral and evaluate your deal—you’ll soon get an Accepted or Rejected communication from the team
- Respond to the offer (if accepted)
According to experienced HML lenders, anyone with healthy collateral and enough equity investment is approved for a loan without further questions. Accepted candidates get the funds in their accounts within 3–10 days.
Unsure if your deal would be considered? Apply for an HML Solutions loan today and talk to a seasoned lender to get a realistic assessment of your situation.
Source: Mikhail Nilov
Investing in Hard Money Loans—Tips for Borrowers
Hard money loans carry the same risk bank loans do—you can lose your collateral if you mess up your payments. The difference with hard money borrowing is that the interest obligation is slightly larger. Most lenders also charge a prepayment penalty if you settle before your tenure.
Informed borrowing is the best way to go if you’re dealing with hard money loans. Here are some tips that can help:
- Chalk out a watertight repayment strategy—Don’t rush into hard money borrowing without being exactly sure if you can keep up with the payments. For slow-moving real estate, it’s better to get a bank to refinance your loan so that your monthly interest payments are minimal
- Pay off strategically—Compare the prepayment penalty with interest savings if you’re looking to close the loan early. If you need funds for a super short period, go with the lender with the most lenient prepayment terms
- Ask your lender questions—Since hard money lenders face less severe restrictions than banks, some lenders can be tight-lipped about future terms affecting the borrower. If you find yourself dealing with one, ask questions about everything you’re charged. The ideal lending package should appear reasonable and appeal to your common sense
At HML Solutions, you don’t have to pay any penalty if you finish off the loan after six months. Contact the lenders to enjoy a seamless and thoughtful borrowing experience.
Featured image source: Peter van Eijk