In addition, depending on the property type, a business plan for the project, including a budget for renovation costs, title statements and property assessments may have to be included. Banks require more extensive paperwork, while hard money lenders require less.

For those seeking hard money loans, they can be obtained from hundreds of private financial firms both small and large. Many of these lenders can be found locally or online by the click of a mouse, but it is important to research for complaints and compliance.

Sometimes the existing property owner may be able to provide financing for the investment, or fix and flip deal. Local banks, credit unions and large nationwide banks also offer real estate loans.

Another place to obtain a loan is through an existing mortgage. Current homeowners who have built up enough equity in their home can apply for a home equity loan or line of credit (HELOC). This can allow the buyer to borrow up to 80 percent of the equity value against their primary residence. Being that your primary residence is used as the collateral in this transaction, it can be a more risky way to secure financing for those who are inexperienced property investors.

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Different Types of Hard Money Loans

There are similarities between each of these and some of the names are used interchangeably in the real estate and financial industries.

Bank-issued loans for terms of 15 to 30 years can be used to purchase long-term non-owner-occupied properties in good condition. These loans offer lower interest rates than hard money private lenders.

Government sponsored lender Fannie Mae, offers a HomeStyle Reily one-unit investment properties, units in condos, co-ops, mobile homes and planned unit developments (PUDs). Any renovation or repair is eligible, as long as it is permanently affixed to the property and completed within a year of the loan issue.

In some cases the party selling a property can offer a loan to the buyer. Other non-conventional ways of funding a loan is by partnering with someone who has the cash, receiving a loan from friends or family, borrowing from a retirement account or 401k, taking out a personal or business loan or home equity loan or line of credit (HELOC).

Hard Money Loans vs Traditional Loans

Flexibility. Hard money lenders do not use a typical bank underwriting process so agreements can be more flexible than traditional loan agreements. Negotiations regarding terms and requirements can be a lot less stringent with a hard money lender than a bank.

Approval. Since the most critical factor is collateral, the lender will provide financing typically up to 85 percent of what the property is worth. Those who have a foreclosure or negative events on their credit report will find a hard money lender is much more forgiving than a bank lender.

Speed. Hard money loans close quickly in comparison to other loans. The application process of a hard money loan can take a few days. In contrast, a bank mortgage application can take weeks to complete due to the financial records and documentation required.

In addition, the approval process for a bank loan can take a month or more. With hard money lenders, the approval process often takes less than a week. Experienced buyers or builders who have an established a relationship with a hard money lender can get through the process even quicker than new borrowers.

Hard Money Loan vs Bridge Loan

Frequently referred to as hard money, a bridge loan often finances a property that may be in transition and does not yet qualify for traditional financing. Bridge loans are short-term loans used until other permanent loan financing can be secured. A bridge loan allows the borrower to fulfill current obligations or property rehabilitation by providing immediate cash flow.