A residential hard money loan is a way for borrowers to get money for a home purchase without using traditional lenders. Hard money loans don’t use traditional forms of credit for approval but rather rely primarily on collateral. Although traditional mortgage loans also use homes as collateral, hard money loans typically require higher levels of collateral and charge higher rates. But for some borrowers, hard money loans may be the best — or only — option for their financing needs. Here’s a closer look at the characteristics and uses of residential hard money loans.

                By                    John Csiszar

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What Is a Hard Money Loan?

If you’re looking for a hard money loan, you won’t likely find one at your local bank or credit union. Hard money lending qualifies as specialty lending, meaning you’ll have to visit either a private investor or a company specifically dedicated to hard money lending. 

One of the main appeals of a hard money loan is that you can access your money much faster than if you’re applying for a traditional mortgage. However, part of the reason for this speed is that hard money lenders don’t have to comply with the same laundry list of regulations that traditional lenders do. This makes hard money loans inherently riskier for the financing company, which is why they are almost always more expensive for borrowers than traditional financing. 

Another important characteristic of hard money loans is that they typically have much shorter repayment periods than traditional mortgages. You’ll likely have to repay your hard money loan in just a few years rather than the 15- or 30-year periods that are more commonly used for residential purposes. 

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How Do You Qualify for a Hard Money Loan?

In one sense, it’s easier to qualify for a hard money loan than a traditional mortgage. This is because a hard money lender doesn’t typically rely on traditional financing criteria such as credit scores and debt-to-income ratios. Rather, a hard money loan uses collateral as the main basis for approval. In other words, you should expect to put up a significant down payment if you’re looking to use hard money to finance a purchase. This reduces risk for the lender, as they can liquidate the equity in your home to pay off the loan if you can’t keep up with your payments.

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Who Would Use a Hard Money Loan?

Residential hard money loans appeal first and foremost to those who can’t qualify for traditional lending. For example, if your credit score is too low to qualify for a traditional mortgage, or if you have the type of negative financial history that most traditional lenders avoid, a hard money lender might be your only option. The same is true if your debt-to-income ratio is too high for a traditional mortgage. But if you’re determined to buy a house but no traditional bank will give you a mortgage, hard money lending may become more appealing.

Hard money loans are also often used by house flippers, who need money fast to complete their transactions. Since the idea behind house flipping is to get in and out of the property as rapidly as possible, the high interest rate attached to a hard money loan isn’t as important as the need to get money fast. 

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Should You Get a Hard Money Loan?

In most cases, financing a residential home purchase via a traditional mortgage is the best choice for most borrowers. Although getting a traditional mortgage takes more time, it almost always results in a longer term, a lower interest rate and a more affordable payment structure. But if you can’t qualify for a traditional mortgage, or if you need money fast for a house flip or other investment opportunity, a hard money loan might be an option for you.

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Last updated: Aug. 31, 2021