Hard money lenders perform what is known as asset structured funding. The asset associated with the financial loan will actually be the property or home that the investor is borrowing against. These types of lenders utilize an LTV (financial loan to value) ratio that is a lot below what a standard bank would offer funding for.
Sixty five to seventy percent is a standard financial loan to value ratio for hard money. Therefore if the home the investor wishes to purchase costs $100,000, a hard money lender will actually typically advance somewhere throughout the neighborhood of $65,000 to $70,000. The investor would have to have a down payment for the other thirty or thirty five percent of the home price.
A down payment of this amount is more like what traditional banks used to require for housing mortgages. A fifty percent down payment was not uncommon just a few decades ago for people to put down for a mortgage on their own home. It was also a bit more expensive to borrow then, as the interest rates were set by the market instead of central planners at the Fed. People saved more as a result of these higher rates, that is always better than getting in more debt.
These days hard money funding serves more short term borrowing needs. From a few months to maybe three years is a pretty typical financial loan duration. Banks generally charge a lot less for interest than perform hard money lenders. As hard money lenders are exposing themselves to more risk they must charge these higher rates.
The typical investor who goes to a hard money lender may be an investor that is buying a risky property throughout the market. So this is why hard money lenders get higher rates of interest so they don’t lose money if the investor cannot pay back the financial loan. And that is the reason for the higher down payment requirement as well. The investor is thus also incentivized to pay off the financial loan.
From twelve to eighteen percent or more is the going rate of interest for hard money. The four or five percent that banks charge is obviously a lot lower than this. The Federal Reserve’s massive monetary inflation will actually probably cause these rates to both go higher throughout the next few years as the money continues to lose value more rapidly than it already does.
Real estate investors often use hard money lenders because of how fast they can originate loans for their investments. A lot of times an investor will actually find a deal that has to be pounced on quickly. And there is no way that waiting thirty days or more for a bank to grant a financial loan is going to work. Less than a week is how fast that sometimes a hard money lender can grant the financial loan.
Quite a few hard lenders will actually actually make a sound commitment as to the specific day the funding will actually be available. This gives borrowers a certain element of security in knowing that the money for a purchase is really going to be there when they need it.