Hard Money Loan Programs
Hard Money Loan is a specific type of asset based loan financing avenue which a borrower receives funds secured by the value of the property or properties of real state. Hard Money loans are typically issued by private investors, with much higher interest rates versus conventional commercial or residential property loans because of higher risk taken by the lender. most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan which know as a mezzanine loan, a second Loan lien or a junior loan lien.
Most hard money loans are used for short term projects lasting from a few months to a few years. Hard money is similar to a bridge loan, with 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, versus Hard Money often refers to not only an asset based loan with higher interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are in progress.
The qualifications criteria for hard money loan varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. However hard money lenders primarily qualify a loan amount based on the value of the real state being collateralized. Classically, the largest loan one expect would be maximum of up to 75% of the property value. As an example, if the property is worth $1,000,000.00 the lender would advance up to $750,000.00 against it. The low LTV (loan to value) provides added security for the lender, in case the borrower decides not to pay and the lender have to foreclose on the property.
Cross Collateralizing A Hard Money Loan
In some cases, the low LTV do not facilitate a loan sufficient to pay off a existing mortgage lander, in order for the hard money lender to be in first position of the lien, only because a security interest in the property is the basis of making a hard money loan, the lender usually always requires first lien position of the property. As an alternative to a potential shortage of equity under the minimum lender LTV guidelines, many hard money lenders programs will allow a “Cross Lien” on another one of the borrowers properties. The Cross collateralizing of more than one property on a hard money loan transaction, is also referred to as a “Blanket Mortgage” which no all homeowners have additional property to cross collateralize. Cross Collateralizing or blanket loans are more frequently used with investors on Commercial Hard Money Loan Programs.
Commercial Hard Money Loans
Commercial Hard Money is similar to traditional hard money, except usually will be more expensive as the risk 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 residential mortgage maybe be in the state the Mortgage is issued. Commercial Hard Money Loans are often short term and therefore mutually referred to as Bridge Loans or Bridge Financing Loans.
Commercial Hard Money Lender or Bridge Programs
Commercial hard money lender and bridge lender programs are similar to traditional hard money in terms of loan to value and interest rates. A commercial hard money or bridge lender will usually be a strong financial institution that has large deposit reserves and the ability to make a unrestricted decision on a non conforming loan. These borrowers are not conforming to the standard Fannie Mae, Freddie Mac or residential conforming credit guidelines. Since it is commercial property, they usually do not conform to a standard commercial loan guideline either. The commercial property and or borrowers may be in financial distress, or may not be complete during construction, non sufficient building permits, or simply be in a good marketable condition for any number of reasons.
The more riskiest it gets, some private investment groups or bridge capital groups will require joint venture or sale lease back on transactions that have high likelihood of default. Private Investments groups may temporarily offer bridge or hard money, allowing the property owner to buy back the property within only a certain time period and the property not bought back by purchase or sold within the time period specified, the commercial hard money lender may keep the property at the agreed to price negotiated.
Moreover, the traditional commercial hard money loan programs are very high risk and have a higher that average default rate and when the property owner defaults on the commercial hard money loan, they may lose the property to foreclosure. Additionally if they have exhausted bankruptcy previously, they may not be able to gain assistance through bankruptcy protection, therefore the property owner may have to sell the property in order to satisfy the lien from the commercial money lender, and protect the remaining equity on the property.
Legal and Regulatory Issues
from commencement, the hard money field has always been formally unregulated by state or federal laws, although some restrictions on interest rates (usury laws) by state governments restrict the rates of hard money such that operations in several states, including Tennesse and Arkansas are
practically illogical for lending firms.
Hard Money Rate
Hard Money Mortgage loans are generally more expensive than traditional sub prime mortgages. Private investors are generally only willing to create hard money loans in return for a very high interest rate close to 11.5% plus five points for residential home purchases.
Interest Rate On Hard Money
The rate is not dependent on the Bank Rate. It is instead more dependent on the real estate market and availability of private hard money credit. As of 2008 and for past decade hard money lending had ranged from 12%-21%. In case of a default borrowers may be charged a higher “Default Rate” allowed by law, which may go up to or around 25%-29% with option on lender collecting a prepayment penalty or not.
Hard Money Points
Generally 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 average hard loan. It is very common for a commercial hard money loan to be upward of 4 points, and as high as 10 points. There are various reasons a borrower would pay rates this high as there are borrowers. Essentially all reasons have something to do with the speed or lack of credit requirements that are beneficial characteristics of most hard money loans. Occasionally there is an opportunity to purchase a property at a fruitful discount if the buyer can raise the cash quick enough. Frequently personal or business needs require cash quickly or money is needed by a borrower who would not be otherwise get capital due his credit or existing debt not qualifying him for a conventional mortgage.
Moreover, all hard money borrowers are advised to use a professional real estate attorney to assure the property in not given away by way of late payments or other default without benefit of traditional procedures that would require a court judgment.
Mortgage Bankers Corp is a specialist, expert source for Hard Money loan and Hard To Get Loans. Contact us for a complementary assessment of your existing properties or purchases you are considering.
