Hard money lenders take a different approach: they lend based on collateral securing the loan, and they are less concerned about your ability to repay. If anything goes wrong and you can’t repay, hard money lenders plan to get their money back by taking the collateral and selling it. The value of the collateral is more important than your financial position.
Speed: because the lender is mostly focused on collateral (and less concerned with your financial position), hard money loans can be closed more quickly than traditional loans. Lenders would rather not take possession of your property, but they don’t need to spend as much time going through a loan application with a fine toothed comb – verifying your income, reviewing bank statements, and so on. Once you have a relationship with a lender, the process can move quickly, giving you the ability to close deals that others can’t close (that’s especially important in hot markets with multiple offers).
Flexibility: hard money agreements can also be more flexible than traditional loan agreements. Lenders don’t use a standardized underwriting process. Instead, they evaluate each deal individually. Depending on your situation, you may be able to tweak things like the repayment schedules. You might be borrowing from an individual who’s willing to talk – not a large corporation with strict policies.
Approval: the most important factor for hard money lenders is collateral. If you’re buying an investment property, the lender will lend as much as the property is worth. If you need to borrow against a different property you own, that property’s value is what the lender cares about. If you’ve got a foreclosure or other negative items in your credit report, it’s much less important – some lenders might not even look at your credit (although many lenders will ask about your personal finances).
Most hard money lenders keep loan-to-value ratios (LTV ratios) relatively low. Their maximum LTV ratio might be 50% to 90%, so you’ll need assets to qualify for hard money. With ratios this low, lenders know they can sell your property quickly and have a reasonable shot at getting their money back.
Hard money loans make the most sense for short term loans. Fix-and-flip investors are a good example of hard money users: they own a property just long enough to increase the value – they don’t live there forever. They’ll sell the property and repay the loan, often within a year or so. It is possible to use hard money to get into a property and stay there, but you’d want to refinance as soon as you can get a better loan.