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You can read a lot of things about hard money online. Here is the problem: much of the information found in blog posts and financial advice columns is misleading, at best. Some of them are flat-out wrong. That is unfortunate because hard money is a valuable tool to investors.
It is time to demystify the largely unknown entity that is hard money. The best way to do that is to look at the actual practices of hard money lenders like Salt Lake City’s Actium Lending. Despite what you may have read or heard, the vast majority of hard money lenders are legitimate businesses doing things by the book. They are not predatory lenders looking to rip off their customers and steal their properties.
A Form of Private Lending
The first thing to understand about hard money lending is that it is a form of private lending. Hard money lenders are not banks, credit unions, or licensed mortgage lenders. They are actually businesses licensed by the states in which they operate.
A hard money firm could be run just like a sole proprietorship. A single person interested in making money by lending out his substantial financial resources could fund it entirely. But more often, hard money firms are funded by multiple investors willing to pool their money for lending purposes.
Private Lenders Are Regulated
One of the most misunderstood aspects of hard money is related to regulation. Consumers simply assume that hard money lenders are completely unregulated and free to do whatever they want. That is not the case.
Unlike banking, hard money lending is regulated exclusively at the state level. Therefore, lenders are not bound to the same regulations state and federal regulators lay on banks and credit unions. Private lending regulations are not as restrictive. But hard money lenders are still regulated.
How Private Lenders Conduct Business
Less restrictive regulations allow hard money lenders to do business in a very different way. For starters, they can follow an asset-based lending model rather than the credit-based model traditional lenders follow. This makes an enormous difference in a practical sense.
Traditional lenders cannot leave any stone unturned in their effort to determine whether a borrower can truly afford to borrow. They look at credit reports, pay stubs, debt loads, tax returns, and any other documents demonstrating the borrower’s creditworthiness.
Hard money lending is different. Because it is asset-based, lenders make approval decisions based primarily on the value of the collateral a borrower is offering as security. According to Actium Lending, the majority of hard money loans go to real estate investors. Their collateral tends to be the properties they are acquiring.
Hard Money Is Short Term
Another key difference between traditional and hard money lending is the typical term. Conventional loans tend to offer terms of 10 years or longer. A 5-7-year term is possible in some cases. But terms on hard money loans are considerably shorter. Lenders rarely exceed 24 months. Terms of 6-12 months are the norm.
Shorter terms are not necessarily a bad thing, especially for real estate investors who only need access to hard money for closing deals quickly. They move on to traditional financing after the fact.
A Valuable Financing Option
Contrary to so many online claims, hard money is actually a valuable financing option investors appreciate having access to. But they are not the only ones. Businesses often find hard money a better option than traditional financing. Hard money fills a gap left by traditional financing, thereby helping borrowers meet their financial goals in a timely and efficient way.
