Hard Money Definition And Points To Remember
Hard Money Definition
The term ‘hard money’ is often used to illustrate a funding stream with sources from a private lender or alternative lending institution. Most often the money is loaned out on real estate. Hard money could be in various forms such as purchases of property that a bank will not lend on.
Additionally, hard money definition can refer to physical currency, for example, coins that are made out of rare metals such as gold, platinum or silver. Circulating currency with a value that’s directly proportional to the value of the particular commodity is also referred to as hard money.
Read the whole article to see all the different definitions of Hard Money.
Soft Money vs Hard Money Definition
In general, the terms ‘hard money’ and ‘soft money’ are often used to illustrate various types of currency in economics. Coins are hard money while paper currency can be referred to as soft money.
However, the terms also play a huge role when it comes to politics. The can be used to describe the political contributions in the state. Hard money would refer to money that’s contributed directly to a chosen candidate. On the other hand, soft money would refer to indirect contributions to specific political action committees and political parties. It’s crucial to understand the difference between political donations in terms of hard and soft money.
Points to Remember About Hard Money
Hard money is a popular type of funding originating from organizations and governments since it allows a predictable stream of funds. With a student scholarship, for instance, it offers budget certainty to the specific student who’s preparing for his or her time in school. Hard money can be contrasted with one-off grants, in that, the latter can make budgeting and long-term planning more challenging.
Since it illustrates the nature of the currency, hard money is less frequent in the global economy today. A majority of the countries make use of fiat money, which is a currency issued by the government and is not backed by any physical commodity like gold or silver. The paper lacks its intrinsic value without this fiat. Remember, hard money has a specific value tied to the cost of its underlying commodity. In comparison, the fiat money’s worth ties only to demand and supply factors. By using fiat money, governments can have more flexibility in case of a financial crisis.
Other Forms of Hard Money
Like mentioned earlier, the term ‘hard money’ can also be used in politics and lending. But how exactly?
- In politics, hard money could refer to the funds donated directly to a particular political action committee or a politician. These hard money contributions come with regulations and limitations, including the amount you can give and the role of the funds. In contrast, contributions to political parties which don’t have similar controls and limits are often referred to as soft money donations. For instance, if a person can contribute up to a certain amount in hard money every election to a particular candidate in 2019, they could contribute an unlimited amount to a specific political party. The political party could redirect funds to their chosen candidates.
- When it comes to lending, the term ‘hard money loan’ is used to refer to a loan that’s backed by the value of a certain physical asset like home or car. The loan’s collateral will be the cost of the asset. These types of loans generally have a higher interest rate compared to what the borrower may obtain via a traditional mortgage lender or any other recognized financing channel. Certain individuals or private investors most often provide a hard money loan as last resort lenders due to timing or maybe the borrower’s distressed financial situation.
Learning More About Hard Money Loan Requirements
A hard money loan is a type of short-term bridge loan that’s typically used when purchasing real estate. This is the most common use of the term, “Hard Money”. These loans are not first resorts and are designed for people with credit issues that might prevent them from obtaining another type of loan. If you’re interested in these loans, you’ll want to take a closer look at hard money loan requirements.
A Down Payment Is Essential
The primary thing you’ll need to secure a hard money loan is a down payment. If you’re planning on purchasing a residential property, you’ll need a down payment of 25 to 30 percent to secure a loan. For commercial properties, your down payment will typically have to be somewhere between 30 and 40 percent.
You may be able to leverage properties that you already own to secure a loan. It may also be possible to obtain one of these loans without a down payment if you already have equity in the property. With that said, a request for a hard money loan that comes with a substantial down payment has a much higher chance of being approved. Hard money lenders are wary of any borrower that comes in looking for 100% financing.
You’ll Need Cash Reserves
Before you can be approved for a loan, you’ll have to prove to the lender that you’ll be able to make loan payments without any issues. This means you’ll have to show your cash reserves. If you have a large amount of money in your bank account, there is a high chance you will be approved for your loan.
If you don’t have cash reserves, it’s unlikely that you’ll be able to meet any lender’s hard money loan requirements. You need to prove to a lender that you have the funds to cover monthly loan payments as well as any holding costs associated with the transaction. If this isn’t something that you can do, you’ll want to look at other types of loans.
Experience Is Important
Lenders aren’t willing to give out these types of loans to people that don’t have experience with real estate. You’ll need to show that you have experience with real estate investments, and you’ll also want to show the lender that you have an exit strategy in mind. For example, you might plan on improving the property and then re-selling it. You may also plan on refinancing in the future.
If you have limited experience, you’ll want to provide detailed information about your plans to your lender. You’ll want to provide them with extensive details on the project and show them how you plan on paying the loan back. First-time investors are unlikely to be eligible for one of these loans.
You Must Provide The Necessary Documentation
A potential will want to see several documents before they provide you with a loan. You’ll need to show them documents that show the worth of the property you’re purchasing, but you’ll also need to give them documents that provide a clearer picture of your finances, like bank statements, W-2s, and paystubs.
It’s best to make sure you have all of these documents in advance so that you’ll be able to present them to your lender when they request them. Some documents may take time to obtain, which is why you’ll want to start securing the necessary documents sooner rather than later.
Check to see if you meet hard money loan requirements and decide if this type of loan is a smart choice for you. While a hard money loan isn’t ideal, it might allow you to make a real estate investment that will be very profitable for you.
Here’s What You Should Know About Hard Money Loan Rates
When it comes to hard money loan rates, you’ll want to know what the average lending rates are and how rates work. There are a number of factors that affect rates too. The rest of this article will cover those topics.
What Are The Average Lending Rates
Generally speaking, rates can range anywhere from as little as 7.5% to 15%, and that is with terms of between three months to 36 months. The main things that hard money pricing is based on include equity, risk and the experience that the borrower has, if the hard money loan is being used for a fix-&-flip. Furthermore, lenders determine what the guidelines are, which is not the case with conventional loans.
How Does Hard Money Loan Rates Work
Private lenders set the rates for hard money loans. There is no standard they have to follow. Different lenders offer different rates on their hard money loans. Also, the rates are not set by loan programs backed by the government or by the prime rate.
The rates are set after the lender determines what the risk of the project entails and how much equity is in the project or property. The appetite of the investor, in regards to the project, also plays a role in what the rates will be.
What Affects Rates
The exit strategy affects rates. In order to be approved for a hard money loan, you’ll have to show prospective lenders you have a clear exit strategy. Also, the owner of the property needs to have equity. If you have a clear exist strategy that makes perfect sense, then this may help you get a lower rate on a hard money loan.
Besides exist strategy, the loan-to-value ratio will factor into what your rate will be. The more money a borrower has to risk, the lower the risk the lender will be taking and they will take this into consideration when determining what the rate for the loan will be. If you want to receive a low rate on a hard money loan, then you should try to get as much money as possible for the project you’re going to work on.
The region where the loan is being given out plays a role in rates too. Rates can greatly vary from one state to the next, as well as city to city. There are two main types of lenders, with one being nationwide lenders and the other being small lenders that provide loans to a smaller region. Lenders that provide nationwide hard money loans typically base their rates on where the property is actually located.
Speaking of location, the competition is another factor. If you apply for a hard money loan in a region where there are many lenders offering the loans, then you can expect to receive a competitive rate. The opposite may be true if you apply for a hard money loan in a region where there is little to no competition.
Floating & Fixed Rates
Floating rates on hard money loans are adjustable or variable, meaning they can change throughout the term of the loan. Fixed rates are exactly that, meaning you will pay the same interest rate throughout the entire term of the loan. As for which you should go for, you’ll want to make the decision on your own after weighing the pros and cons of each.
Now you know more about hard money loan rates. Remember, if you want to get a good rate on a hard money loan, then make sure you compare as many lenders as possible. Do not accept the first hard money loan you’re approved for, unless you are confident you are receiving a good and fair rate on it.