Hard Money (2024)

What is Hard Money?

Hard money has many different meanings depending on the context and can relate to currency, loans, and political donations, to name a few. In general, it refers to a specific funding chain that is generally provided by a government agency or other financial organizations. Rather than a one-time permit, hard money is a flow of funds that comes in the form of ongoing and scheduled payments that consistently benefit the user.

Another way to describe hard money is actual physical currency. In such a case, hard money would represent coins made out of precious resources, such as platinum, silver, and gold.

What is a Hard Money Loan?

A hard money loan is a type of loan that is secured by real estate and is considered somewhat difficult to acquire. The property, in this case, is the collateral.

Used in real estate transactions, a hard money loan is granted by individual investors or companies, not banks, because they are generally a last-ditch effort and riskier.

On account of risk, hard money loans come with higher interest rates because they can lead to a substantial financial burden if the borrower defaults on the individual investor or company.

Pros of Hard Money Loans

• They can be closed quicker than traditional loans due to collateral.
• They are flexible and do not use an underwriting process.
• Financial position is not the primary concern.
• Payment is not emphasized because the borrower provides collateral.
• The lender may benefit from default if the collateral is substantial.

Cons of Hard Money Loans

• They come with a lower loan-to-value ratio because of real property protection.
• They charge higher interest rates.
• The lender faces considerable risk.
• The lender may not provide financing for owner-occupied residence because of property rules and regulations.

Examples of Hard Money Loan Borrowers

In most cases, hard money loans are used by property flippers to fund potential projects. In addition, hard money loans can be given for a variety of different reasons.

1. Wholesale Funding

Since hard money loans can be obtained quickly, they are used for wholesale flips. Wholesale funding is beneficial because it can be used instead of contract assignments and does not allow the buyer and seller to know your financial spread.

2. Property Flippers

As mentioned, property flippers seek hard money loans to fund their future projects and provide the project as collateral. In addition, the loan amount is generally based on 90% of the purchase price plus 100% of the repair costs.

3. Renovate and Rent

Like property flippers, some individuals seek hard money loans for property projects intended to be rented after. Such types of acquisitions are funded in the same way as property flippers but are expected to be refinanced for a longer term once the actual project is completed. It is to ensure the best value for the property.

Hard Money vs. Soft Money

Financial Context

In the most basic economic context, hard money is used to describe physical currency, such as coins, while soft money is used to describe paper currency. In regards to finance, they take on a different definition.

A hard money loan refers to asset-based financing where the borrower receives funds that are secured by real property. In most cases, private investors are the biggest lenders of hard money loans, and they are considered difficult to acquire.

A soft money loan refers to an asset-based form of financing that carries a below-average interest rate and is generally easy to acquire. Although a soft money loan is still secured by real property, it is considered much easier to acquire in comparison.

Political Context

In politics, hard money and soft money refer to campaign funding that comes from different types of contributions.

Hard money refers to donations used to directly support or oppose a candidate running for federal office.

Soft money refers to donations that are used to directly support political parties and not specific candidates that are outside of the federal limits and are often referred to as “non-federal” contributions. The donations can be spent on generic objectives, such as general party support.

More Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Default Risk
• Non-Owner Occupied
• Quality of Collateral
• Secured vs. Unsecured Loans
• See all commercial lending resources