A hard money loan is a helpful way for real estate investors to get quick funds. These are short term loans, usually lasting less than two years. They are typically not disclosed on a credit report, but you should still disclose them to other lenders when seeking a conventional loan.
Though they are still bound by certain federal regulations, hard money lenders can make their own stipulations regarding what documentation they require. They also focus much of their decision-making process on the real estate in question rather than the borrower’s finances.
As such, a hard money loan can be useful for those whose debt to income ratio or credit score disqualifies them for other financing, whether that is for an investment or a primary residence.
Many real estate investors may turn to hard money loans when they need a construction loan or funds for a down payment, especially when they are flipping property using the BRRRR method, as the approval process is much faster and requires little documentation.
A hard money loan can be opened in just a few days as opposed to the weeks or months it takes to get other loans approved, making them a good option for those who need to quickly close on an investment property.
Homeowners may also use this when they urgently need renovations on their primary residence but aren’t able to take out a home equity loan or open a HELOC.
The Bottom Line
Hard money loans don’t typically show up on credit reports, but they can. Lenders for this type of loan have more discretion in who they approve, and they may report to credit bureaus should you fail to repay. They also appear on background checks, meaning that if you miss payments, you may have difficulty accessing other loans.
A hard money loan can be used as a construction loan or to quickly finance investments. They are not bound by conforming loan limits, meaning you may be able to borrow more than you could with other loan types.
It’s important to note that these loans typically have higher interest rates than other forms of financing because they have a much shorter term. You may also have to make a balloon payment at the end of the term if you have chosen an interest-only option, so it’s critical that you measure risk versus reward when pursuing this type of loan.
