Buying Homes with Hard Money Loans

A “hard money” loan is much easier to get than a typical mortgage.  However the interest rate will typically be much higher rate than a regular bank mortgage, and the loan will usually have to be repaid in a short time:  perhaps 6 months to 2 years.  The qualifying procedure is much easier than when dealing with a large bank.  The lender is relying on the equity in the house itself for most of the lender’s security.  Normally, hard money lenders won’t loan more than 70% of the “After Repaired Value” or “ARV” of the house.  For example, let’s say someone is buying a house which will be worth $130,000 when it’s fixed up.  So as a guideline, the hard money lender won’t loan more than $130,000 X 70% = $91,000 against this house.  That should give the lender room to take the house away from the buyer (foreclose) if necessary and still sell the house for enough to get all the lender’s money back.  Foreclosures on these loans happen very rarely because the houses are purchased at such a good price to begin with, but when foreclosures happen, the hard-money lender usually makes a bigger profit after selling the house than if he had gotten paid as agreed.  In that event, the buyers would lose everything, so the buyer must always plan accordingly. 

Hard money loans are much faster to do than bank loans.  In many cases, these can be done in 2 or 3 days.  However, it’s best for a buyer to plan on 2-3 weeks until they have a working relationship and experience with a given hard money lender.  
To protect everyone involved, the paperwork goes through an Escrow Company or a Title Company --- something like a referee.  The Escrow or Title Company handles all the paperwork, collects the money from the buyer and the lender, and disperses the money to the seller.  The lender’s money is secured by a mortgage (it may be called a Deed-of-Trust in some states), just the same as a mortgage from a large bank.  That mortgage is a lien against the house which cannot be removed unless the lender signs a form saying the lender’s been paid in full.  (Technically, the government can foreclose if the property taxes go unpaid for a long time, and that will normally erase the mortgage --- but that doesn’t help a buyer.)  Like any mortgage company, the lender can pay for the taxes and insurance and charge the buyer for them if the buyer fails to pay it themselves. 
At payoff, the buyer would pay the full amount the lender had loaned them, plus a certain number of “points”.  Each point equal 1% of the amount of the mortgage. 

The people who make these loans earn a very good return on their money with minimal work, and the money is well-secured by the real estate.  The buyer gets a house they might not be able to purchase in any other way, and can then fix it up for sale or to refinance it and keep it to live in or lease out.