For an average borrower, everything beyond traditional borrowing may seem scary. Utter “hard money lender,” and some people immediately conjure up the image of an aggressive hustler hackling someone to pay up, which is nowhere near the truth.
There’s no place for uncertainty when you’re making borrowing decisions. We have set up this guide to analyze the pros and cons of hard money loans without any filters. This financing product is a blessing in many situations but can easily become a curse if not used responsibly. You’ll find out:
- Whether a hard money loan would work for you
- What risks are associated with the product
- How to select an appropriate hard money lender
Hard Money Loan—A Product Birthed by Demand
When a traditional lender, such as a bank or a credit union, offers a loan, their selection criteria are primarily individual-focused. The loan officer assesses the borrower’s ability to repay (which is a soft asset) by considering the following:
- Credit health
- Existing debt
- Job or income stability
- Debt repayment history
- Tax returns
To sum it up, you need to come with excellent credentials to qualify. Naturally, screening an individual for these aspects is time-consuming and entails submission (and resubmission) of paperwork. The entry rituals grew even stricter after the 2008 housing crisis that triggered several foreclosures and was partially attributed to reckless lending.
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While the current lending process of banks is thorough, it comes at the cost of efficiency. You cannot be 100% sure you’ll qualify or get funded in time, which leads to the genesis of hard money loans. These products are rooted in catering to four categories of borrowers—those who:
- Don’t qualify for traditional loans
- Desire a less bureaucratic setup
- Want or need funds faster
- Use seamless funding to grow their investment portfolio
Unlike conventional loans, hard money loans are asset-focused. Hard money lenders evaluate the hard or the tangible asset to decide whether to authorize a loan. They’ll only lend if the collateral’s value covers the loan amount, which drastically lowers the entry barriers for the product.
Hard money loans form a wing of the private lending industry. Like any other privatized product, this type of funding comes with a set of pros and cons.
Pros—What Makes Hard Money Loans Work?
The pros of hard money loans are reflected in the simplicity of structure, convenience, and flexibility. Check out the top seven generalized benefits:
- Versatility of use
- Relaxed entry requirements
- Fast turnaround
- Flexible terms
- No amortization schedules and insurance outlays
- Light prepayment penalty load
- Personal touch with the lender
Versatility of Use
Hard money loans were initially used for real estate purchases, more specifically, for rehabbing and flipping properties, but have become more versatile over time. While banks have all sorts of complicated products for different uses, a single hard money loan can fit into various scenarios for borrowers—here are some examples:
| Borrower | Potential Uses |
| Homeowner | • Expanding construction on your current home • Buying a new home while trying to sell your current one • Getting a refinance or a cash-out refinance • Leveraging home equity for urgent cash • Getting a down payment for a conventional loan |
| Investor | • Flipping properties • Buying a rental property • Holding on to appreciating properties for profits |
| Business entity | • Buying fixed assets • Funding a new startup • Acquiring an existing business |
Relaxed Entry Requirements
Hard money lenders do not fuss over borrowers’ personal qualifications, which means you can qualify even with a bad FICO score or irregular debt history, provided you find a suitable lender. Another plus is that you can request loans with a high debt-to-income (DTI) ratio—this is particularly beneficial if you are an investor and want to expand your portfolio by holding multiple properties.
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Fast Turnaround
You generally have to wait for 45–90 days to get the approval for bank loans, and in case you don’t qualify, that is a colossal waste of time. Hard money lenders communicate decisions quickly and often provide funding within 2–3 weeks.
Flexible Terms
Conventional loans are carefully designed to meet a certain purpose, such as financing a mortgage or commercial construction, so the structure i`s inflexible. If you choose the right hard money lender, you can negotiate the terms of the loan based on aspects like interest rate, tenure, and repayment schedule.
No Amortization Schedules and Insurance Outlays
Banks require amortization installments every month, often coupled with an insurance payment, which increases your cash outflow. Hard money lenders usually ask for interest-only payments every month, while the loan principal is due only at the end of the tenure.
Most lenders also don’t require you to have mortgage insurance, which lowers your monthly cost commitment. This arrangement is ideal for deals like rehabbing, where the cash inflow is available only when the property is sold or refinanced with a traditional mortgage.
Light Prepayment Penalty Load
You have to face heavy prepayment penalties if you settle a long-term debt early with traditional lenders because your action messes with their projected yield. In the case of hard money loans, lenders typically offer short-term instruments, so the likelihood of paying an inconveniencing prepayment penalty is low.
Personal Touch With the Lender
Hard money lenders are private financiers, so they adopt a more interpersonal approach than traditional lenders who are preoccupied with following bureaucratic guidelines. If you find a cooperative lender, the entire experience can feel incredibly supportive and turn into a long-term professional relationship.
Cons—What Are the Drawbacks of Hard Money Loans?
When you think of an asset-backed loan, the risk of foreclosure is the first red flag that comes to mind, but we won’t include that in our list of cons. Foreclosure is a possibility with every loan—conventional or alternative. The difference is that banks lend when the risk of default is low, based on the applicant’s financial profile. Since hard money lenders don’t hyper-analyze borrower credentials, they withstand a higher lending risk.
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A hard money loan, by its nature, exposes you to three major disadvantages in general:
- Short tenures
- Moderate-to-high annual financing cost
- Low loan-to-value (LTV) coverage
Short Tenures
Because they’re dealing with greater risk, hard money lenders service short-term loans, usually for one to three years (say five years if you’re pushing too hard). If you want a long-term home loan, hard money financing won’t work for you. That being said, these loans do work for:
- Bridge financing (until you secure a long-term mortgage)
- Opting out of (refinancing) a current loan
- Getting rid of debt quickly
While the short tenure is hardly a problem for investors, you may have to consider long-term financing solutions if your property doesn’t sell or you plan to keep it as a rental investment.
Moderate to High Annual Financing Cost
Hard money loans are more expensive,with 1.15 to 3 times higher interest rates than the rates for long-term mortgages. The closing costs and legal fees are the same as with traditional loans.
High interest rates don’t bother most borrowers because they’re going to repay or refinance quickly anyway, so it’s like a little premium for convenient and time-sensitive funding. Don’t opt for hard money loans if you doubt your capacity to keep up with the interest-only payments.
Low Loan-To-Value (LTV) Coverage
The LTV coverage is the size of your mortgage expressed as a percent of the total property or collateral value. Traditional lenders, besides lending at low-risk levels, also enjoy many subsidies from federal sources, which allows them to service 80%–97% LTVs. Since hard money lenders use private capital at high risk, they usually don’t offer more than 75% LTV. Whatever your funding situation is, you have to put down more money if you use hard money loans over traditional ones.
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Stay on the Right Track by Choosing the Right Hard Money Lender
The risks in the hard money lending scene are outweighed by numerous benefits, but all is possible only if the most important component of the equation is solid—the lender. Anyone with surplus funds to invest may advertise themselves as a hard money lender. You have to do your due diligence to figure out whether a lender will float your boat or make it sink.
Choose lenders who have been doing hard money financing for years. Make a list of lenders in your area and compare their reputation, interest rate, and funding process. In general, reliable hard money lenders have:
- Decent customer ratings
- Stringent property appraisal standards
- Organized and informative websites
- Transparent operations
- Authentic customer consultancy services
- Reasonable fees
Watch out for hard money lenders who are in for quick money and seem overeager to lend, sometimes even without conducting a property appraisal. Responsible asset-backed lending requires an appraisal to facilitate a fair loan structure—otherwise, you’re probably dealing with unethical opportunists drooling over your collateral.
Embrace Quality Funding Services—Work With Hard Money Loan Solutions
Navigate hard money borrowing confidently by working with a lender that cares—Hard Money Loan Solutions (HMLS) is a compelling alternative if you want fair and fast asset-based funding! The organization is based in Florida and offers two core services:
- Personalized hard money-related consultancy
- Full spectrum of hard money loans, including products for:
- Real estate purchase (all structures)
- Construction
- Refinance
- Rehabbing or flipping
- Cash-out refinance
- Land acquisition
- Business funding
- Foreclosure prevention
- Commercial properties
The group is powered by private capital from a pool of veteran lenders, established investors, and savvy entrepreneurs with one unifying goal—to make growth opportunities more accessible to everyone, regardless of background and financial profile. Bring a promising funding deal to HMLS, and you can walk away with a significant hard money loan package within two weeks!
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One of the best aspects of working with HMLS is the power to customize your loan. After catering to various borrowers over the years, the team believes that every client has specific needs that cannot be met by a one-size-fits-all structure. Depending on your preferences, you can set up an HMLS package within the following parameters:
| Parameter | HMLS Package |
| Interest rates | 9.99%–12% (dictated by LTV) |
| Term | 1–3 years |
| Interest rate type | Fixed |
| Loan amount | $100,000–$50,000,000 |
| LTV | Up to 70% of the current purchase price or appraised asset value (whichever is lower) |
| Origination fee | 2 points or 2% |
| Closing time | 3 days to 2 weeks |
| Amortization | No, interest-only payments |
| Prepayment penalty | Not required if repaid after 6 months |
HMLS Services—Keeping It Real With a 5-Star Rating!
HMLS lenders have funded numerous deals, some even in precarious situations where more than one asset had to be collateralized. Despite the challenges, they have struck the right balance between being helpful and lending responsibly. HMLS holds a 5-star service rating on Google by upholding:
- Time-conscious screening and funding
- Minimal paperwork requirements
- Transparent decision-making process
- Reliable funding promise (after approval)
- Complete guidance for real estate investment
Source: Google Reviews
Reach out to HMLS lenders to request a free consultancy on your funding scenario. If your deal doesn’t meet the group’s standards, they will still try their absolute best to offer alternative borrowing options.
On average, HMLS services all applicants offering healthy collateral that complements the LTV. The lenders use a mixture of online (services like Zillow) and on-site techniques to appraise the property. You can use HMLS’ LTV calculator to get an estimate of how much you can borrow.
What To Expect When You Apply for an HMLS Loan
You can apply for an HMLS loan online. Here are the steps to follow:
- Open the HMLS online loan application form
- Enter the following details:
- Name, contact details, and address
- Particulars about your property/project
- Requested loan amount
- Add questions or comments (optional) that can help with the evaluation
- Attach a document (if necessary)
- Submit
The HMLS team does a quick research based on your application, and a team member calls you. From that point on, the deal can be comfortably built up with quality discussions. Once your package is designed to fit your needs, pay a small retainer fee to complete the legal work that solidifies the loan.
As a borrower, you have full freedom to ask any question about the logistics at HMLS. The team strives to be helpful at all times—if your repayment strategy backfires down the line, you can discuss other solutions with a lender beforehand to avoid foreclosure.
Do Hard Money Loans Show Up on a Credit Report?
According to current regulations, most private lenders do not have to report to credit bureaus. Certain lenders self-report to these organizations about specific accounts, so it’s best to ask your loan provider for details. Remember that if you default on the loan, the lender has every right to report your delinquency, which will bring down your credit score.
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