Are Hard Money Loan Rates High?

When you’re looking for financing on a potential real estate investment deal, you’ll inevitably stumble on the option of using a hard money loan. But if you’re only used to seeing the terms offered by traditional banks for mortgages, then you’ll no doubt do a double-take when you see the interest rate that comes with a hard money loan. But are hard money loan rates high because they can be, or are they high for other reasons?

Hard money loan rates are typically higher than mortgages because the lender takes on more risk. However, using hard money for fix & flips is better than using a mortgage because of the way hard money loans are designed to be used.

We’ll get into that in a minute, but first, let’s talk about what a hard money loan is (and isn’t), what you’ll need to do to qualify for a hard money loan, and I’ll even throw in a few tips for how to get started with your own hard money lending business. Let’s dive in.

What Are Hard Money Loans?

Hard money loans are a type of loan that is typically used to finance properties that are not readily available to traditional lenders. These loans are often more expensive than conventional loans, but they come with the added security of a higher interest rate.

The Difference Between Hard Money Loans and Traditional Loans

1. Traditional loans often come with lower interest rates and require a longer repayment period than hard money loans.
   
   
2. Hard money loans are typically used for short-term financial needs, such as purchasing or upgrading an investment property, while traditional loans are used for longer-term financial needs, such as buying your own home or refinancing an old mortgage.
   
   
3. Hard money loans are available from a variety of lenders, while traditional loans are typically offered by banks or credit unions.
   
   
4. Hard money loans are often less expensive than traditional loans and require less documentation.

What Affects Hard Money Loan Rates?

There are a few things that affect hard money loan rates. Lenders consider factors such as the type of property being purchased, how long it will take to repay the loan, and whether or not there is any prepayment penalty.

Also, hard money lenders need to consider the costs of doing business in your state. No lender works in all 50 states, and every state has different requirements, taxes, and fees associated with lending money. Consequently, the interest rate can change simply based on where your investment property sits.

Why Hard Money Interest Rates Are So Much Higher Than Traditional Lenders

If you’re trying to compare hard money loans against a traditional mortgage and getting sticker shock from the interest, there are a few things you need to know:

1. Traditional lenders can keep their interest rates low because they can sell your loan off to Wall Street (which is why they have such stringent requirements for approval), known as “recapitalizing.” Recapitalizing allows banks to earn additional profits from your existing loan, so they’re not entirely reliant on you and, consequently, don’t need to charge a high-interest rate. However, hard money lenders don’t sell your loan to someone else; they take on all the risk and are the only people you’ll ever have to work with to handle your loan. Because of that, their interest rates can’t be subsidized.
   
   
2. Hard money lenders can’t borrow money from the government the way traditional banks or credit unions can, so they take on more risk.
   
   
3. Hard money lenders often fund loans for properties that traditional lenders wouldn’t see as viable since hard money loans are based on After-Repair Value (ARV) while mortgages are based on the current appraisal value. 

Why Should I Get a Hard Money Loan?

Glad you asked! Here are a few reasons why hard money loans are so outstanding for real estate investment:

• • You can get more money – Hard money loans are based on ARV, whereas traditional mortgages are based on the current appraisal value. Since you’ll need more money for rehab and repairs, hard money loans are better suited for fix & flips than a mortgage.
    
    
  • No credit checks
    
    
  • Very fast to get – Typically run around 10 – 20 days to get your loan funded, while mortgages take around 30 – 45 days.
    
    
  • No monthly payments – Your hard money loan won’t become due until a few months into the loan, whereas a mortgage requires payment from Month 1. 

• No job history requirements.

• You can take out multiple loans. Traditional banks get jumpy when they see multiple mortgages on your credit report. Hard money lenders understand you’re in a business that requires multiple capital streams, so they’re less bothered by the number of loans you take out. 

What Are the Risks of Taking Out a Hard Money Loan?

There are a few risks associated with taking out a hard money loan you should consider before diving in:

• Hard money loans have shorter terms than traditional mortgages, so you’ll need to pay back your loan within the first few years after taking out the loan.
  
  
• Hard money loans are secured by the investment property. If you can’t pay back your loan, the lender can seize control of your house.

How to Get a Hard Money Loan

The requirements for a hard money loan include:

• A clean background check. Speaking as a hard money lender, we’re not really interested in your credit scores or employment history. Still, if you’re wanted by the FBI or are consistently in collections, that’s something we’re going to need to know.
  
  
• A good deal. Is there a way for you to earn a profit on this, or will you end up scrambling to pay back your loan?
  
  
• Equity. Hard money loans are based on the hard asset (the house. Fun fact: “hard asset” is where the name “hard money” comes from!) and not the individual.

While these aren’t required, having these things will help boost your chances:

• Experience flipping houses. Many lenders will work with new fix & flippers, but the more experience you have, the better your chances for getting approved.
  
  
• A good credit score. Hard money lenders won’t base your approval on your credit score, but it never hurts to have a high score to get better terms or interest rates.
  
  
• A down payment. Some lenders won’t require you to put anything down, but your loan could be cheaper if you have some skin in the game.

A Comparison of Popular Hard Money Lenders Around the Country and Their Terms

How Can I Become a Hard Money Lender?

There are many ways to become a hard money lender. Some people start their own lending businesses, while others work for a lending institution that provides hard money loans. There are also many opportunities to become a hard money broker, which is someone who helps borrowers find hard money lenders.

• You need to have capital you can lend. Money can come from your assets (401k, IRA, savings, line of credit) or from other investors, though there are legal requirements for working with investors.
  
•  Have an extensive network of fix & flipping businesses. You can’t loan money if no one knows you’re a lender, so you’ll need to market your business to interested flippers looking for gap financing or hard money loans. The easiest way to do this is by having an extensive network you can tap into, so you’ll need to spend time getting out there and meeting other investors. You can also offer referral incentives to help boost your network by giving anyone that refers business to you a small percentage of the funded loan as a referral fee. 

The Bottom Line

So are hard money loan rates high? Of course, that is a question you could ask, but really it is not the right question. What you’re really asking is, “Are hard money loan rates high compared to____?” As compared to traditional mortgages? So what? They are not even the same thing. That is what it boils down to.

What you really want to ask is:

• What are the hard money loan rates for the loan I want, considering the circumstances I am currently in?
• What is the purpose of the loan you need?
• What is your credit like?
• Do you have business partners?
• What kind of security can/will you offer?
• Are there going to be cash-flow considerations?

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