What is hard money? Mortgage origi- nators often get this question from prospective clients when discussing potential financing options for the
purchase of a property.
The hard money industry’s roots can be traced back to
the mid-20th century when the United States economy
saw a major overhaul in the way lending was presented
to potential borrowers. Then, in the real estate crashes
of the 1980s and 1990s, the industry endured major
setbacks and was forced to reexamine itself and the
manner in which it issued financing.
In recent years, the term “hard money” has changed
in meaning somewhat. Prior to the subprime mortgage
crisis, hard money meant just that: cold, hard cash.
Essentially, it was money that belonged to a private
investor that was loaned to an individual using real
property as security for the loan. Some bad actors
gave the term a negative connotation because of
shadiness and even outright deception in their dealings
As the years passed, so has the negativity surrounding the term. Hard money is again considered a useful
tool to be leveraged when attempting to secure financing for investment and other types of properties.
Before originators suggest hard money loans to their
clients, however, they should learn about the pitfalls
and advantages of the programs and the lenders —
just as with any other financing option — so they can
efficiently and accurately represent that information to
Speed and flexibility
Hard money loans are often offered to borrowers who
are enduring circumstances that make conventional
loans difficult or impossible to use. Often, hard money is the best option for borrowers who are in a time
crunch, because the turnaround time from application
to funding is much quicker for hard money loans than
This quick turnaround is especially useful for borrowers wishing to purchase properties that are in high
demand or subject to multiple offers. Once purchased,
these borrowers can then take the time to secure long-term conventional financing — with the assistance of
the originator who helped them secure the property
in the first place.
In addition to being fast, hard money loans also are
highly customizable. Contrary to the one-size-fits-all
model of traditional lending, many characteristics of
hard money loans can be tailored to fit the individual
needs of a borrower, including repayment terms and
underwriting requirements. Hard money can be the
best option for borrowers who are already subject to
multiple mortgages on various properties, for example, so they can be useful to real estate investors who
often deal with multiple investment properties.
Finally, hard money loans afford a competitive edge
to auction-attending borrowers. The typical scenario
at a real estate auction involves several potential cash
buyers competing for properties. With hard money
loans, the competition is expanded to include buyers
using financing. These buyers can leverage their fi-
nancing to participate and ultimately win an auction
property. Hard money loans also can help these bor-
rowers renovate or maintain the property until they
choose to put it up for sale.
Originators who wish to work with real estate investors will need to research hard money lenders in their
area to find the best options for their investor clients.
As time is almost always of the essence in these deals,
that research needs to be done ahead of time, so the
deal can go through quickly when it is brought to the
Costs and concerns
As with all things, however, nothing comes for free.
Hard money lenders are willing to extend financing to
borrowers who do not qualify for conventional loans,
which makes their investment inherently riskier. To account for this risk, hard money lenders charge interest
rates that are often much higher than those of conventional loans. An originator’s clients will need to understand this up front.
In addition, hard money lenders are more interested
in the value of the property than the credit profile of
the borrower, which places much more scrutiny on the
property. Hard money lenders often are much more
conservative when placing a value on a subject property than a conventional lender. This lower property
value ultimately translates into lower loan amounts
because of loan-to-value (LTV) ratios — which also are
generally lower for hard money loans than for conventional loans.
Lower values and lower LTVs means that hard money lenders require substantially larger downpayments
from an originator’s clients. Where conventional
borrowers often can find financing with anywhere
from a 3 percent to 10 percent downpayment, a hard
money borrower often must make a 25 percent to
30 percent downpayment — or higher — to be
approved for a hard money loan.
Houtan Hormozian is vice president of Crestico Inc. He is
an accomplished mortgage veteran in both wholesale and
retail operations and currently serves as the president of
the North Los Angeles Chapter of the California Association
of Mortgage Professionals. Hormozian distinguishes himself
as both coach and mentor, coaching his team in the short
term to complete tasks while mentoring in the long term
in the interest of personal and professional development.
Reach him at email@example.com.
Hard Facts about Hard Money
Do your research on private financing before counseling clients
By Houtan Hormozian
For more articles on hard money
View these articles and more at
“Hard Money Opens Doors to New Clients,”
Continued on Page 58 >>
“An Unexpected Duet,”
“Regulations Bring Change to Hard Money Deals,”
“The Next Generation of Hard Money Lending,”
“Hard Money Lends a Hand,”