Many people ask the question: What Is A Hard Money Loan? For starters, the definition of Hard Money Loan can come in several forms. For the most part, Hard Money Loans are loans based primarily on the asset that the money is loaned against. In most cases, real estate is the primary asset that Hard Money Lenders use to secure their money.
Purpose of a Hard Money Loan?
Why would anyone get a Hard Money Loan from a Hard Money Lender when they can get a loan from their local neighborhood banker? Well, the answer is –“if they could get a loan from their neighborhood banker like Bank of America or Wells Fargo, then they probably would get it from them.” But, if the borrower was in a hurry to get the money for their property they would bypass a regular bank and opt for a Hard Money Loan.
Another reason why someone would go for a Hard Money Loan is that they do not qualify for the loan with their local banker for some reason. Perhaps the reason is that their credit is questionable, or they cannot prove income, or their down payment money – but they have it. In any of these cases, a regular bank would not be able to loan money, but a Hard Money Lender could because they have different loan approval criteria than a regular lender.
Examples of Hard Money Loan Purposes
- Commercial property that needs rehabilitation upon purchase by a new owner
- Speed is of the essence (private money – hard money deals can be submitted, approved, and funded all in the same day). Typical loan approval and funding times run around 2-3 weeks whereas a commercial loan at a bank could take in excess of 4 months to fund.
- Purchase of a commercial property that has no income or revenue generation at the time of purchase. In other words, if a property has no commercial tenants then a regular bank will probably pass on the deal whereas a Hard Money Lender would loan money for it provided particular conditions about the property were met.
- Hard Money Loans can be used as a bridge loan until regular longer term commercial financing can be achieved with a regular federally insured lender.
- Most banks do not like to lend, or are prohibited from lending on raw land, but Private Hard Money Lenders are not regulated the same way and are often used to fund raw land purchase transactions.
Qualifications For A Hard Money Loan
Typically, Hard Money Loans are used for all types of real estate such as commercial, office, raw land, industrial, mixed use, land development, retail, multi family and single family dwellings. The general guideline to qualify for a hard money loan is how much equity is left in the deal after the loan. Typical equity or loan to value limits are up to 65% depending on the strength of the borrower, the property and other contributing factors.
What Are The Typical Fees Charged For A Hard Money Loan?
Most Hard Money Lenders charge upfront fees – points, a loan processing fee, a loan document preparation fee, an application or inspection fee, and some type of pre payment penalty fee. Typical points charged on a Hard Money Loan are somewhere between 3-5% of the loan amount. The pre payment penalty fee is generally based on some period of time but most do not typically exceed 1 year and they are often as short as 3 months of mortgage interest. Typical title insurance and escrow fees are charged.
What Is The Interest Rates of Hard Money Loans?
Interest rates for Hard Money Loans range anywhere from 10-15% - and maybe even higher. For the Hard Money Lender, they know that their money is at risk when they lend it so that lend it at a premium interest rate. Hard Money Loans are temporary as no one wants to pay a high interest rate for long term; therefore a Hard Money Lender is also charging a higher interest rate and fees because this is their only way to make money with their money.
Any mortgage broker or mortgage banker can set you up with a hard money lender if you need this type of real estate financing.
