- Hard money loans differ from conventional real estate loans in several ways. First, a hard money loan is mainly based on the value of the property as collateral. The credit worthiness of the borrower is also looked at, but it is not the main criteria. Also, on a hard money loan the loan to value that a lender will lend is much lower than on a conventional loan--typically 60 to 70 percent loan to value.
- The main benefit of a hard money loan is the time it takes to process. Typically, lenders are private investors and they make loan decisions much faster once the property value is established. Banks and other traditional lenders have a much longer underwriting process and may have to go through much paper work and committees to make a decision. Hard money loans are also used for non traditional projects or developments that traditional lenders will not likely approve.
- The main drawback for hard money loans is that they are very expensive. Interest rates range from 12 to 18 percent, sometimes higher, with 3 to 6 points. Because they are so expensive hard money loans are often the loans of last resort and only used for a short time. Still hard money loans are useful when the borrower has poor credit or the project is not something a traditional lender will lend on. Hard money loans can be used to fund a deal that otherwise would not get done.
