A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk taken by the lender. Most hard money loans are used for projects lasting from a few months to a few years.
Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring. Hard Money is faster (can fund in 24hrs) and asset based only. Bridge Loans tend to be asset/credit based and can take 7 days or longer.
The qualifying criteria for a hard money loan varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. Most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized and the purchase price.
However, most hard money lenders primarily qualify a loan amount based on the value of the real estate being collateralized. Typically, the biggest loan one can expect would be between 55% and 70% of the property value. That is, if the property is worth $100,000, the lender would advance $55,000 – $70,000 against it.
This low LTV (loan to value) provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.
Also, Hard Money lenders typically require a down payment of 20-30%.
Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers around 60% of the market value of the property. For the purpose of determining an LTV, the word “value” is defined by today’s retail market depending on the condition of the property. For experienced investors most Hard Money lenders will give full retail value for a property only needed cosmetic repair. as “today’s purchase price.” This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month time frame. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.
Hard Money Mortgage loans are generally more expensive than traditional sub-prime mortgages. However all mortgage loans are not necessarily considered to be a high cost mortgage. Generally a hard money loan carries additional risk that a borrower is aware of. Private investors are generally only willing to create hard money loans in return for a very high interest rate. The rate is not dependent on the Bank Rate. It is instead more dependent on the real estate market and availability of hard money credit. As of 2008 and for the past decade hard money has ranged from the mid 12%–21% range . When a borrower defaults they may be charged a higher “Default Rate”. That rate can be as high as allowed by law, which may go up to or around 25%–29%. Some private lenders will collect a prepayment penalty and some will not.
Points on a hard money loan are traditionally 1 to 3 more than a traditional loan, which would amount to 3 to 6 points on the average hard loan. It is very common for a commercial hard money loan to be upwards of four points and as high as 10 points.