Hard Money Lenders

Hard money lenders make short term loans (usually 24 months or less), and often charge a fee of as much as five percent or more of the loan amount, and up to fifteen percent or more annual interest. Why would you want to go to such a lender? Because they take risks and get the money to you fast. These kinds of loans are typically used for the purpose of purchasing and rehabbing houses.

Consider the following scenario: You want to buy a house as a fixer upper project. The sellers is looking at a market full of buyers who put in their offers contingencies like waiting for the sale of their house, or applying at ten banks and other lenders. But because you are willing to use hard money lenders, you get to say "I can close for cash in a week or less." Now that gets the seller's attention right away.

How Hard Money Works

Usually you can only get 65% to 70% of the property value, but not the existing value. That's another advantage of borrowing this way. These lenders will loan you up to 70% of the ARV, or "after repair value," which will be determined by their appraiser. The loan will also be based on the property itself more than on your credit, another reason you may want to go this route.

Here's a quick example:

Suppose you find a house that needs some work. You make an offer for $100,000 and you expect that once you have fixed it up it will be worth $160,000. A hard money lender agrees with your assessment of the deal, and lend you $112,000, which is 70% of the projected ARV. You actually get more than 100% financing, although the excess $12,000 goes into a escrow account to be drawn on for repairs as you make them.

In a few months you have made the repairs and sold the house for $164,000. Your total costs for repairs amount to about $13,000. Holding costs and selling expenses amount to $9,000. In the end you pay $10,000 to the lender in fees and interest. That's an expensive loan, but on the other hand, you made a net profit of $20,000 on a deal that perhaps no bank would have lent on. That's why people use hard money lenders.