Hard Money Loans
Every so often borrowers have situations (foreclosures, bankruptcies, tax liens, etc.) arise where they're in need of what I call "Fedex" loans, where the money "absolutely, positively has to be there" and more or less "overnight". That's when the services of a hard money lender is required. They can be super-quick, some can be obtained in as little as a day or two. Their services don't come cheap: no one borrows money at these rates but under the most exigent of circumstances. But as the saying goes, "when you gotta have it, you gotta have it!"
If you own real estate, hard money lenders will make loans that you couldn't obtain anywhere else. They may be lending companies or private investors, generally in their local areas. Because of the costs associated with these loans they are generally regarded as lenders of last resort. Like Johnny Carson's oily pitchman, Art Fern, if you're in bankruptcy, if you're in foreclosure, if you have no FICO score, "they don't care". Most don't require Verification Of Employment (VOE), a Verification Of Deposit (VOD), a Verification Of Mortgage (VOM), a Verification Of Rents (VOR) a business license or CPA letter if you're self-employed, and there's no seasoning for cash. It's all NO PROBLEM!
Understandably, people often ask why it's called "hard money" if so little documentation is required. The answer, simply put, is that among investors, money is deemed to either be "soft" or "hard" based on the cost to obtain it and the terms associated with it. Typically, soft money is cheaper and the terms are flexible. Hard money, on the other hand, is just the opposite: It is dearer, which is not to say that it's more difficult to obtain, but it is more restrictive. It used to be that hard money lenders would lend solely based on a percentage of the property's fair market (or appraised) value. Consequently, in the event of a default, the only protection afforded the lender lay with the collateral value of the real property. Because most hard money comes from private individuals it also accounts for why hard money is also referred to as "private money". The money used for investment purposes comes from people, just like you and me, not a commercial bank or deposit institution. But now, because new lending laws offer more consumer protection, hard money lenders have to consider more than just equity before agreeing to lend because abiding by the new laws is more time consuming and expensive.
Several states' usury laws prevent hard money lenders from operating in their accustomed fashion. Regulation of hard money not only differs by state, it differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumers generally have additional protections in individual states. Some of the most aggressive loan terms are issued by commercial hard money lenders. In addition, the type of property (non-owner occupied vs. owner-occupied) being lent upon may also be a factor in determining if a state's usury laws allow for legal hard money lending.
Hard money is more expensive because the loans are inherently riskier since are not based upon traditional credit guidelines that conventional banks utilize to minimize their default rates. As already noted, with a hard money loan the credit score of the borrower is of little or no importance, as the loan is secured only by the value of the real property. Hard money lenders will do 1st & 2nd trust deed loans and loan amounts ranging from $100,000 to $2,000,000, although some lenders will decline 2nds under $417,000 (recently changed from $250,000) because of Section 32 (predatory lending laws). The one overriding condition for doing a hard money loan is Loan To Value (LTV). Most lenders will extend credit in the range of 55%-65%, with an LTV of 60% being the norm. The low LTV provides added security for the lender, in the event that the borrower does not repay the loan and it becomes necessary to foreclose on the property. Generally speaking, they'll loan against residential properties, condos & townhouses, and they'll provide funds for lot loans, bridge loans, construction loans, and small apartment buildings. Most are OK with cross- collateralization and multiple borrowers.
Hard money collateral is typically the real estate loaned on. Sometimes it may include other assets of the individual or business borrowing the hard money. In certain situations, a lender may be willing to lend up to 65% ARV (after repaired value). This means that a hard money lender can loan you up to 65% of what the home is worth in repaired condition. So if you find a home worth $45,000 in "as is" condition that needs $20,000 in repair work, and its post-rehab market value would likely be $100,000, then they MIGHT lend you up to $65,000, which would cover the cost of the house and the repairs, but in such a case the lender would likely want you to title it over to them until it sold because they ordinarily prefer that you to have some "skin in the game". In some cases the money needed by the borrower may exceed the percentage the lender is willing lend on the subject property. In those instances the solution is for borrowers to offer additional real estate as collateral in order to obtain a larger loan amount. This is known as Cross-collateralization, whereby the collateral for one loan is also used as collateral for another loan. The cross-collateralization ends only when the borrower has repaid the outstanding loan, until such time the cross-collateralized property remains encumbered.
Borrowers opt for a hard money loan for a variety of reasons. Most often, it's because the borrowers are in distress and financing is unavailable from conventional lenders due to poor credit resulting from credit "lates", a bankruptcy or where foreclosure proceedings are involved. Sometimes, it's simply because of inability to provide the documentation typically required for a conventional loan. In a few cases, a hard money loan is sought because of a business opportunity where time is of the essence. Yet another reason for hard money financing would be to obtain a bridge loan (also known as a swing loan) which is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. An example would be where a homeowner is purchasing a new home, but has not yet sold his old home and needs the money from the pending sale to qualify effect the new purchase. The term, however, for a typical hard money loan ordinarily ranges from 6 months to 5 years.
Other considerations are how quickly funds will be available. Many times, when an investor finds an investment property, there is a need to move quickly and the ability to have access to funds can make all the difference. Hard money lenders are swift. Because they do not require the income and asset verification that typical lenders require, they can close a loan in a matter of a few days as opposed to the month or more that would be required with a conventional lender. While both hard money loans and bridge loans have similar lending criteria, as well as costs to the borrowers. The primary difference with a bridge loan is that it often refers to a commercial property or residential property that may be in transition and does not yet qualify for traditional financing, whereas a hard money loans typically refers to only an asset-based loan with a high interest rate.
So what does one have to pay for all this speed, convenience and lack of documentation? Cheap they aren't the rates range from 9-15% straight interest. Additionally, hard money lenders will charge anywhere from 4-10 points as an origination fee. (One point equals one percent of the mortgage amount). So charging 1 point on a $100,000 loan would be $1000. As David Zigrang of Seaside Funding stressed to me, "The pricing for a loan is on a case by case basis." Typically, the actual interest rate and points are dependent upon a range of requirements: the percentage of loan-to-value, the type of real estate and the minimum loan size.
So what is needed to do one of these loans? Usually, only an application (form 1003), a credit report (for purposes of determining ability to repay the loan), a preliminary title report and an appraisal (the last 3 items vary according to lender) is required.
Commercial hard money is a term describing a commercial loan that is generally non-bankable, meaning the company usually does not meet the standard banking criteria, but has real estate and or assets that are sufficient to collateralize the loan to the investors/lenders. Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a commercial property or residential investment property. (Note: commercial hard money lenders are often willing to go to 70% LTV on commercial property because the rents provide cash flow and added protection for the lender). It can also be secured against a residence in conjunction with a business property as a means of obtaining additional collateral for the lender. That type of additional security is referred to as a blanket mortgage. The sources of asset based commercial hard money loans are generally the following:
* 1. Private Individuals
* 2. Mortgage Companies
* 3. Federal Banks
* 4. SBA Lenders
These different commercial hard money lenders have their respective pluses and minuses. For example, a private individual may offer special terms, yet in the event of a delinquency may be unwilling to offer a work out plan as a matter of procedure. One also needs to be consider pre-payment penalties. A federally-chartered bank may offer a competitive loan rate in comparison to an individual, but may demand a high pre-payment penalty fee, costing the borrower more money if they decide to sell or refinance the loan within one to five years.
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