From Wikipedia, the free encyclopedia Hard money loan
Hard money loan
A hard money loan is a specific type of asset-based loan from the sale of the property in the event that the loan
financing through which a borrower receives funds se- defaults and the property must be sold in a one- to four-
cured by the value of a parcel of real estate. Hard money month timeframe. This value differs from a market value
loans are typically issued by private investors or compa- appraisal, which assumes an arms-length transaction in
nies. Interest rates are typically higher than convention- which neither buyer nor seller is acting under duress.
al commercial or residential property loans because of Below is an example of how a commercial real estate
the shorter loan durations associated with hard money purchase might be structured by a hard money lender:
loans. Most hard money loans are used for projects last- 65% Hard money (Conforming loan)
ing from a few months to a few years. Hard money is sim- 20% Borrower equity (cash or additional collateralized
ilar to a bridge loan, which usually has similar criteria for real estate)
lending as well as cost to the borrowers. The primary dif- 15% Seller carryback loan or other subordinated (mezza-
ference is that a bridge loan often refers to a commer- nine) loan
cial property or investment property that may be in tran-
sition and does not yet qualify for traditional financing,
whereas hard money often refers to not only an asset-
History
based loan with a high interest rate, but possibly a dis- Hard Money is a term that is used almost exclusively in
tressed financial situation, such as arrears on the existing the United States and Canada where these types of loans
mortgage, or where bankruptcy and foreclosure proceed- are most common. In commercial real estate, hard mon-
ings are occurring. ey developed as an alternative "last resort" for property
The qualifying criteria for a hard money loan varies owners seeking capital against the value of their holdin-
widely by lender and loan purpose. Credit scores, income gs. The industry began in the late 1950s when the credit
and other conventional lending criteria may be analyzed. industry in the U.S. underwent drastic changes (see FDIC:
However, most hard money lenders primarily qualify a Evaluating the Consumer Revolution).
loan amount based on the value of the real estate being The hard money industry suffered severe setbacks
collateralized. Typically, the biggest loan one can expect during the real estate crashes of the early 1980s and early
would be between 65% and 70% of the property value. 1990s due to lenders overestimating and funding proper-
That is, if the property is worth $100,000, the lender ties at well over market value. Since that time, lower LTV
would advance $65,000 - $70,000 against it. This low LTV rates have been the norm for hard money lenders seek-
(loan to value) provides added security for the lender, in ing to protect themselves against the market’s volatility.
case the borrower does not pay and they have to fore- Today, high interest rates are the mark of hard money
close on the property. loans as a way to compensate lenders for the consider-
able risk that they undertake.
Loan structure Cross collateralizing a hard
A hard money loan is a species of real estate loan collat- money loan
eralized against the quick-sale value of the property for
In some cases, the low loan-to-values do not facilitate a
which the loan is made. Most lenders fund in the first lien
loan sufficient to pay off the existing mortgage lender, in
position, meaning that in the event of a default, they are
order for the hard money lender to be in first lien posi-
the first creditor to receive remuneration. Occasionally, a
tion. Because a security interest in the property is the ba-
lender will subordinate to another first lien position loan;
sis of making a hard money loan, the lender usually al-
this loan is known as a mezzanine loan, a second lien or a
ways requires first lien position of the property. As an al-
junior lien.
ternative to a potential shortage of equity beneath the
Hard money lenders structure loans based on a per-
minimum lender Loan To Value guidelines, many hard
centage of the quick-sale value of the subject property.
money lender programs will allow a "Cross Lien" on an-
This is called the loan-to-value or LTV ratio and typically
other of the borrowers properties. The cross collater-
hovers between 60 and 70% of the market value of the
alization of more than one property on a hard money
property. For the purpose of determining an LTV, the
loan transaction, is also referred to as a "blanket mort-
word "value" is defined as "today’s purchase price." This
gage". Not all homeowners have additional property to
is the amount a lender could reasonably expect to realize
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From Wikipedia, the free encyclopedia Hard money loan
cross collateralize. Cross collateralizing or blanket loans
are more frequently used with investors on Commercial
Legal and regulatory issues
Hard Money Loan programs. From inception, the hard money field has always been
formally unregulated by state or federal laws, although
some restrictions on interest rates (usury laws) by state
Commercial hard money governments restrict the rates of hard money such that
Commercial hard money is similar to traditional hard operations in several states, including Tennessee and
money, but may sometimes be more expensive as the risk Arkansas are virtually untenable for lending firms.
is higher on investment property or non-owner occupied
properties. Commercial Hard Money Loans may not be
subject to the same consumer loan safeguards as a resi-
Commercial lending industry
dential mortgage may be in the state the mortgage is is- Thanks to freedom from regulation, the commercial
sued. Commercial hard money loans are often short term lending industry operates with particular speed and re-
and therefore interchangeably referred to as bridge loans sponsiveness, making it an attractive option for those
or bridge financing. seeking quick funding. However, this has also created a
highly predatory lending environment where many com-
Commercial hard money lender or panies refer loans to one another (brokering), increasing
bridge lender programs the price and loan points with each referral.
There is also great concern about the practices of
Commercial hard money lender and bridge lender pro- some lending companies in the industry who require up-
grams are similar to traditional hard money in terms of front payments to investigate loans and refuse to lend on
loan to value requirements and interest rates. A commer- virtually all properties while keeping this fee. Borrowers
cial hard money or bridge lender will usually be a strong are advised not to work with hard money lenders who re-
financial institution that has large deposit reserves and quire exorbitant upfront fees prior to funding in order to
the ability to make a discretionary decision on a non-con- reduce this risk. If you feel you have been the victim of
forming loan. These borrowers are usually not conform- unfair practices, contact your state’s attorney general of-
ing to the standard Fannie Mae, Freddie Mac or other res- fice or the office of the state in which the lender oper-
idential conforming credit guidelines. Since it is a com- ates.
mercial property, they usually do not conform to a stan-
dard commercial loan guideline either. The property and
or borrowers may be in financial distress, or a commer- Hard money rate
cial property may simply not be complete during con- Hard Money Mortgage loans are generally more expen-
struction, have its building permits in place, or simply be sive than traditional sub-prime mortgages. However all
in good or marketable conditions for any number of rea- mortgage loans are not necessarily considered to be a
sons. high cost mortgage. Generally a hard money loan carries
Some private investment groups or bridge capital additional risk that a borrower is aware of. Private in-
groups will require joint venture or sale-lease back re- vestors are generally only willing to create hard money
quirements to the riskiest transactions that have a high loans in return for a very high interest rate (often about
likelihood of default. Private Investment groups may 11.5% plus five points for residential home purchases).
temporarily offer bridge or hard money, allowing the Rather than selling the property a borrower will opt to
property owner to buy back the property within only a keep the loan and if a lender is willing to assume some of
certain time period. If the property is not bought back by the risk by offering a hard money loan.
purchase or sold within the time period the commercial
hard money lender may keep the property at the agreed Interest rate on hard money
to price.
The rate is not dependent on the Bank Rate. It is instead
Traditional commercial hard money loan programs
more dependent on the real estate market and availabil-
are very high risk and have a higher than average default
ity of hard money credit. As of 2008 and for the past
rate. If the property owner defaults on the commercial
decade hard money has ranged from the mid 12%–21%
hard money loan, they may lose the property to foreclo-
range . When a borrower defaults they may be charged
sure. If they have exhausted bankruptcy previously, they
a higher "Default Rate". That rate can be as high as al-
may not be able to gain assistance through bankrupt-
lowed by law, which may go up to or around 25%–29%.
cy protection. The property owner may have to sell the
Some private lenders will collect a prepayment penalty
property in order to satisfy the lien from the commercial
and some will not.
hard money lender, and to protect the remaining equity
on the property.
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From Wikipedia, the free encyclopedia Hard money loan
Hard money points See also
Points on a hard money loan are traditionally 1 to 3 more
• Asset-based loan — a similar type of commercial loan
than a traditional loan, which would amount to 3 to 6
based on real estate, indicating the loan will be based
points on the average hard loan. It is very common for
upon a percentage of the properties appraised value,
a commercial hard money loan to be upwards of four
as the key criteria.
points and as high as 10 points. The reason a borrower
• Private money — refers to lending money to a
would pay that rate is to avoid imminent foreclosure or
company or individual by a private individual or
a "quick sale" of the property. That could amount to as
organization.
much as a 30% or more discount as is common on short
• Bridge loan — a similar type of commercial loan
sales. By taking a short term bridge or hard money loan,
based on real estate.
the borrower often saves equity and extends his time to
• Non-conforming loan — a loan that fails to meet
get his affairs in order to better manage the property.
bank criteria for funding.
All hard money borrowers are advised to use a pro-
• Commercial Loan — standard, broad types of loans
fessional real estate attorney to assure the property is
based on commercial property value.
not given away by way of a late payment or other default
without benefit of traditional procedures that would re-
quire a court judgment. References
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