Hard Money lending, or Private lending, is a type of asset based lending in which an individual or group of individuals lends money to a Borrower and those funds are secured by the collateral in the form of a Deed of Trust. These loans typically do not require a credit check or the need to provide financials to the lender. The collateral is the only thing that is underwritten. Due to this and the private nature of the funds, these types of loan are typically able to be funded in very short time frames.
The main differences between Hard Money and Conventional or Institutional Lending are:
- Higher Interest Rate
- Shorter Loan Term
- Larger Down Payment Requirements
- Quicker Loan Funding
Due to the fact that Hard Money lenders don’t underwrite the Borrower their comfort level with the loan comes from equity (or “skin”) that the Borrower puts in the deal. If a Borrower defaults on their payments a Hard Money lender goes through the same process as a conventional lender and takes the property back – in Arizona this happens through the trustee sale process. With this in mind, the Hard Money lender wants to keep their loan amount to a number at which the property would most likely sell if it was taken to trustee sale.
In today’s economic and lending climate, Hard Money Lender’s are as necessary as they have ever been. Most institutional lenders are very cautious these days and have very stringent lending guidelines. This combined with the fact that more and more people every day have something negative on their credit report that would cause a bank to reject their loan request makes Hard Money lenders vital to buyers, especially investors, and the recovery of the housing market as a whole.