Hard Money Lenders
Lending institutions that offer a specialized type of real-estate backed loans are referred to as hard money lenders. Short-term loans that hard money lenders typically provide are called bridge loans and the funding is normally based on real estate values that have been collateralized for the loan. Since the loans normally don't conform to a bank or lending institution's standards, the interest rates on these loans is considerably higher.
Hard lender money and residential hard money lenders do not usually require a strict application process, which is also another reason for the higher interest rates one often sees on these types of loans. Commercial hard money lenders are actually quite plentiful where property and real estate financing is concerned, and the process involving private hard money personal lenders is typically sugar-coated by calling it alternative or creative financing.
Hard money loans are sometimes compared to bridge loans or swing loans in that they are done for very short periods of time (sometimes as little as one to three weeks) while more long-term financing is being arranged. The main difference is that the latter types of loans usually apply to commercial properties and investments that are in transition and haven't yet qualified for traditional financing.
Hard money loans can also be indicative of money that gets borrowed for the purpose of easing a distressed financial situation like a bankruptcy or an arrears on a mortgage as well as a foreclosure proceeding. The other unique characteristic of a hard money mortgage is that it is typically made by a private investor on a local format. The credit score of the borrower is rarely taken into consideration and the loan is generally taken out against the collateral of the property.
The following is an example of how a commercial real estate purchase is often structured by a hard money lender:
- 65 percent hard money (conforming loan)
- 20 percent borrower equity (cash or additional collateralized real estate)
- 15 percent seller carry-back loan or other subordinated (mezzanine) loan
When it comes to determining the loan-to-value (LTV), the word value has the same meaning as today's purchase price. It is the amount that the lender can expect to recoup from the sale of the property that would result if the borrower defaults and the lender is forced to sell it within 30 to 120 days. The value factor of a hard money loan differs from a regular one in that the seller is acting under duress in most instances.
The maximum LTV is usually 65 to 70 percent, so if the property is worth $200,000 you can borrow $130,000 to $140,000 against it. The lower LTV covers the hard money lender should the borrower default and they have to initiate a foreclosure on the property. This is a form of real estate lending that is collateralized against the quick-sale value of the property that the loan was borrowed against.