How does a hard money loan work?

How does a hard money loan work?

Hard money loans are secured by the property they’re tied to instead of the borrower’s credit and financial profile. The loan is typically based on the value of the property and comes with a short repayment term, usually less than a year.

For this reason, they’re often sought out by those who buy homes with the intent to fix them up and offload them quickly. This presents an opportunity for the hard money lender, who (in theory) can count on getting repaid within a relatively short time.

Some hard money loans are structured as interest-only loans, followed by a large balloon payment. This makes them riskier than other kinds of financing.

Hard money loans vs. traditional mortgages

Hard money loans are different from typical mortgages for several reasons. For one, they tend to be faster to apply for, and close quicker, too. Additionally, the repayment term on a hard money loan is much shorter than the more popular 15 or 30 years for a mortgage.

“They are underwritten differently and have different requirements, and they are usually short-term, with some lasting as little as six to 18 months,” says Jeff Shipwash, CEO of Shipwash Properties LLC, a home-flipping company in Knoxville, Tennessee that often uses hard money lenders for its projects.

The interest rates charged for hard money loans are also usually much higher than a traditional mortgage.

“Also, unlike a traditional mortgage, the value in a hard money loan deal is factored into the underwriting much more than the borrower’s credit score,” says Shipwash.