A hard money lender provides short-term loans backed by real estate rather than the borrower’s credit score. Typically, their clients are house flippers or individuals investing in rental properties. Instead of relying on traditional metrics, hard money lenders determine the loan amount based on the after-repair value (ARV) of a property. ARV is the estimated value of a property after renovations are complete.
Because hard money loans carry more risk for lenders, they typically come with higher interest rates and fees. If a borrower fails to repay the loan, the lender can take ownership of the property. This makes it important for borrowers to fully understand the terms and costs before moving forward.
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What is a hard money lender?
A hard money lender provides short-term loans backed by real estate rather than the borrower’s credit score. Typically, their clients are house flippers or individuals investing in rental properties. Instead of relying on traditional metrics, hard money lenders determine the loan amount based on the after-repair value (ARV) of a property. ARV is the estimated value of a property after renovations are complete.
Because hard money loans carry more risk for lenders, they typically come with higher interest rates and fees. If a borrower fails to repay the loan, the lender can take ownership of the property. This makes it essential for borrowers to fully understand the terms and costs involved before moving forward.
How does a hard money loan work?
Hard money loans operate differently from traditional loans, offering flexibility and speed for real estate investors in Portland. Here’s a breakdown of how they work and what you can expect when securing a hard money loan in Portland:
- Short-term loan: Hard money loans are typically designed for short durations, often ranging from six months to two years. This allows investors to complete projects quickly without long-term commitments, unlike 30-year traditional mortgages.
- Faster funding option: These loans can be approved and funded much quicker, often within days instead of the 30 to 50 days that traditional lenders require.
- Less focus on creditworthiness: Unlike traditional lenders who scrutinize your credit score, hard money lenders prioritize the property’s potential, which can make borrowing more accessible to investors with imperfect credit.
- More focus on property value: Lenders base the loan on the loan-to-value ratio of the property and its after-repair value (ARV), rather than your personal financial history.
- Not traditional lenders: Hard money lenders are private individuals or companies, not banks. This difference gives them more leeway in approving loans, especially for unconventional real estate deals.
- Loan denial option: Although they’re more flexible, hard money lenders may still deny a loan if they believe the property or project is too risky.
- Higher interest rates: Expect higher interest rates—typically ranging from 8% to 15%—since lenders take on more risk compared to traditional mortgages.
- Might require larger down payments: Hard money lenders often ask for down payments of 20%–30%, depending on the loan and property.
- More flexibility: These lenders offer greater flexibility in structuring loan terms, making them ideal for investors with unique needs or complex deals.
- Potential for interest-only payments: In some cases, lenders may allow interest-only payments for the loan’s duration, delaying the repayment of principal until the loan term ends.
