What Are Hard Money Lenders and How Do They Work?

What Are Hard Money

Hard money lending is a form of private lending that is terribly misunderstood. Thanks to inaccurate blog posts and undeserved negative media attention, hard money lenders are portrayed as shady dealers looking to rip off borrowers desperate for loans they can’t get from banks. If you are at all interested in hard money, educate yourself about the industry.

Two of the more common questions associated with hard money are:

  1. What are hard money lenders?
  2. How do they work?

Both questions will be answered in this post. If you have further questions after you read this post entirely, there is plenty of good information to be found online. Just stay away from posts and videos that portray hard money lenders as predators that cannot be trusted. They are anything but.

Private Companies Lending Money

Hard money lenders are not traditional financial institutions, like banks and credit unions. Consider them more financial services companies than anything else. Although a private lender could literally be any individual with money to loan out, hard money lenders tend to be private companies licensed by their respective states to provide loans.

Actium Partners is a good example. Based in Salt Lake City, Actium provides loans to clients in Utah, Idaho, and Colorado. They are a private company that loans out money on behalf of the investors who supply the necessary funds.

Private Lending Is Regulated Differently

Banks and credit unions are compelled to follow a strict set of rules and regulations governing how they operate. Private lenders are also regulated, but not by the same rules. They are regulated by an entirely different set of rules as developed by each individual state.

Being under a different set of rules and regulations allows private lenders to do things differently. For example, hard money lenders aren’t required to verify a borrower’s creditworthiness. That’s why they rarely dig into credit reports, proof of income, profit and loss statements, and so forth. They are less interested in creditworthiness and more interested in the asset a borrower offers as collateral.

Hard Money Is Asset-Based

Speaking of assets, hard money lending is asset-based lending. What does this mean? It means that borrowers offer some sort of asset as collateral. Approval decisions are made based on asset value.

Actium Partners specializes in real estate investments. A typical borrower will come looking for a loan in hopes of obtaining a new property. The property in question is the asset offered as collateral. Prior to approving a loan, Actium will appraise the property. Assuming that it is valuable enough to satisfy their needs, approval will be forthcoming.

How Loans Are Structured

Hard money loans are short term loans that usually don’t exceed 24 months. Terms can be as short as 6 months when circumstances dictate. In addition, many hard money loans are interest-only loans. This means the borrower pays monthly interest payments followed by a principal payment on the loan’s due date.

Interest rates are higher on hard money loans due to the extra risk lenders are taking. On a more positive note, hard money lenders can work much more quickly. Actium has been known to fund loans within a single business day. A couple of days is the norm for most deals.

Now you know the basics of hard money lending. You know that hard money lenders are private lenders who make loan approval decisions based on asset value. Note that not all lenders do things the same way. If you were to apply for a hard money loan, your best bet would be to shop around.

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