Frequently Asked Questions

Frequently Asked Questions (FAQ)

What is a hard money lender?

A hard money lender is a lender who makes loans secured by real estate, typically charging higher rates than banks but also making loans that banks would not make, funding more quickly than banks and/or requiring less documentation than banks. Hard money lenders exist because many real estate investors need quick funding to secure a deal when looking for a real estate loan. Conventional Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency in their decision making process, along with quick access to capital.

Hard money loans are also sometimes referred to by the following terms:

Private money loans
Bridge loans/financing
Short-term loans
Transitional loans
Asset-based loans
Collateral-based lending

What differentiates hard money lenders from bank lenders?

Hard money lenders differ from bank lenders in that they often fund more quickly, with fewer requirements. Hard money lenders are sometimes called “asset-based lenders” because they focus mostly on the collateral for the loan, whereas banks require both strong collateral and usually excellent credit and cash flow from the borrower. Hard money lenders are willing to foreclose on and “take back” the underlying property if necessary, to satisfy the loan. Conventional lenders or banks typically look at the borrower to be able to pay back the underlying loan from the borrower’s income, whereas hard money lenders are comfortable looking to a sale or refinance of the property as the method of repayment.

When would it make sense to use a hard money loan?

Hard Money Loans are commonly found in situations where the borrower:

Requires a quick closing and banks cannot meet the deadline
Has more good opportunities than cash
Wants to avoid spending too much time raising equity or debt from many different smaller investors, but prefers to instead focus on finding new opportunities
Has an excellent investment opportunity, but does not have sufficient financial strength to get a bank loan
Has a bank line of credit but needs a larger loan than is allowed under the existing bank line
Borrower has limited Cash Flow
Borrower’s credit doesn’t conform to conventional financing standards

The common theme is that there is an opportunity for the borrower to generate substantial profit (or savings) quickly, and the cost of interest and origination fees is small relative to the anticipated profit, even given the higher interest rates charged by private lenders versus banks.

What are advantages of hard money lenders?

Hard money loans can have a number of advantages over traditional bank financing including:

A simpler application process and quicker approval/disapproval decision
Less scrutiny of the borrower’s personal financial situation, including credit, disposable income and historical tax returns, compared to bank loans as we focus on underlying collateral in the event of default
Borrowers can allocate less time to seeking financing and instead concentrate on other business
Self-employment is not unacceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income

What are some disadvantages/risks of hard money lenders

Disadvantages of seeking a hard money loan may include:

Hard money loans are more expensive than bank loans, with higher interest rates and origination fees
The quality of hard money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on underlying real estate as a business strategy
Risk of lost time if a lender does not perform
Market risk and execution risk on the underlying project
Risk of associating with a less than reputable lender
Risk that the lender fails to come up with the loan amount in a timely manner, possibly endangering a deal (for example, if money is not placed into escrow by a pre-determined deadline)

What kinds of property do hard money lenders lend on?

Hard money lenders will lend on both commercial and residential properties, although most will not lend on owner-occupied residences due to higher thresholds of scrutiny required by law and regulations such as Dodd-Frank. Commercial properties can include industrial, shopping centers, and office buildings. Some, but not all, hard money lenders will also invest in raw land slated for development and even hotels. Vacation homes (single family residences), even if not a primary residence, are considered “owner occupied” and may or may not be financeable depending on the lender’s criteria regarding owner-occupied home loans. We provide loans for both commercial and non home owner occupied residential real estate.

Who funds hard money loans?

Hard money loans are typically funded by individuals or by funds that aggregate capital from multiple wealthy investors. Individuals who invest directly into a single loan are known as trust deed investors. Many trust deed investors are real estate investors/owners who invest in “bridge loans” to keep available capital working to generate a higher rate of return, rather than leaving the capital in banks earning minimal interest rates. Investors who prefer to invest passively in a fund are typically not as experienced in real estate investment and choose to pay the fund manager a fee to oversee the process of sourcing, selecting and originating a series of bridge loans.

What documents are involved in a hard money loan?

Typical loan documents required for a hard money loan include a Note and a Deed of Trust; other documentation requirements do vary but may include a personal guarantee from borrower (sometimes non-recourse loans are issued without a personal guarantee); personal financial statements such as past tax returns and proof of income; Letter of Intent and assurance that the borrower has access to sufficient cash to perform any and all proposed property renovations.

What is the purpose of a Letter of Intent?

The purpose of a Letter of Intent (LOI) for a hard money loan is to provide a quick means to be sure that both the prospective borrower and lender are on the same page. Although this document is not legally binding on either party, it serves to put the prospective deal “in writing” and helps to avoid any miscommunication or misunderstandings.

Why does the lender need title insurance?

Title insurance helps protect someone who has purchased real estate against another party making a claim challenging the ownership of the property and the seller’s right to enter into a transaction. Well known title insurance companies include Fidelity National, First American Title, and Chicago Title. The title insurance company will handle any issues that arise during the property sale, and if a competing claim of ownership is deemed legitimate, the title insurance company is responsible for payment of any fees to the claimant. The reason why hard money lenders insist on being covered under title insurance is to enjoy the same protection as the borrower.

What happens in the event that a Mechanic’s Lien is filed on a property?

A Mechanic's Lien is used in the construction trade when a property owner either fails to pay a general contractor for services rendered, or the general contractor fails to pay sub-contractors according to the terms of their agreements. Since title insurance does not provide any protection against this, hard money lenders will protect against possible Mechanics Liens by making sure that if a loan includes a renovation budget, that all sub-contractor and general contractor releases are properly executed before disbursing funds to a borrower.

How much do hard money lenders charge?

Hard money lenders typically will charge interest rates in the high single digits to low double digits, with a range of 7.5 percent to 12 percent being considered standard. Every state has different Usury Laws that they must abide by in order to be compliant with state laws and regulations. Additionally, origination fees can range from 1-3 points, with any additional points above this range usually signaling that there are numerous brokers involved in the transaction. It should be noted that points paid on a longer-term loan may be beneficial if the borrower needs capital for a longer period of time, as it is not uncommon for many hard money lenders to include pre-payment penalties which guarantee the lender a minimum number of months of interest on the loan principal. Borrowers should also be aware that extension options are possible on hard money loans and are a matter of negotiation with a lender.

What are typical hard money lenders terms?

The typical term for a hard money loan is 6 months to 3 years. Loans requiring greater than a 3-year maturity are usually outside the scope of this form of financing.

Single family home renovations commonly tend to range from 6-12 months in duration, while a commercial renovation term could range from 2-3 years.

Hard money loans often require a personal guarantee and require first positioning as the lender of record, although some lenders are willing to make subordinate junior loans where another lender holds the primary mortgage.

What are typical hard money lenders fees?

The fees usually associated with a hard money loan will include origination fees, possibly a deposit fee, plus an underwriting fee to ensure the loan conforms to necessary lender requirements.

What happens if a borrower doesn’t pay the hard money lenders back?

A borrower who defaults on a hard money loan ultimately is subject to having the lender foreclose on the property which has been put up for collateral. It should be noted that lenders typically follow a sequence of steps in order to try to avoid this final recourse. Such steps may include the lender attempting to reach the borrower to find out the current status and disposition of the property in order to see if things can be worked out cordially; the final step is to file a Notice of Default if necessary to trigger the legal foreclosure process.

What is the maximum loan-to-cost for hard money lenders?

Hard money lenders utilize two different measures to evaluate deals: loan-to-cost (LTC) and loan-to-value (LTV) metrics. While risk tolerance is highly dependent upon the lender, most prudent private money lenders will not exceed a loan-to-cost ratio of 75 percent, while the loan-to-value ratio is usually kept in the 60 to 65 percent range to ensure a sufficient safety margin.

Lenders may use the lesser of the LTC or LTV values to assess a loan, depending on when the property was purchased; in the instance of more recent purchases, lenders will look at what the borrower paid for the property.

What due diligence information do hard money lenders require?

Hard money lenders have different requirements for the due diligence process, but generally speaking, origination of commercial loans will require the most comprehensive list.

Residential loans may require an appraisal from an outside party; a property inspection report; a geology inspection (particularly based on the locale of the structure); and the borrower’s financial records. An in-person inspection of the property is nearly always part of the decision-making process, which is why hard money lenders tend to have a localized focus.

Are hard money loan interest rates usually fixed rate or an adjustable rate?

Most hard money lenders that specialize in single family homes offer loans that are based on a fixed rate but with commercial properties, a floating rate is more common due to the longer term of maturity.

It is worth noting that floating rate loans may have a lower initial rate, but this can quickly exceed fixed rates if interest rates rise during the term of the loan.

Are all hard money loans backed by real estate?

While most hard money loans are backed by real property as collateral, some bridge loans are not real estate backed, the most notable exceptions existing when a hard money loan is backed by another loan from a third-party institution. Other hard money loans may be backed by a variety of collateral such as luxury assets however in most cases those private lenders would need a pawn license.

Are owner-occupied home hard money loans different from all other types?

Owner occupied hard money loans are different from other types, due to state laws requiring extensive documentation intended to protect the borrower from predatory lenders in addition to federal regulations such as Dodd Frank which can make the lending riskier for collaterizing against a homeowner occupied piece of real estate . Many hard money lenders are not set up for compliance in this regard and therefore will not make loans for owner-occupied residential properties.

Can borrowers get a hard money loan even if there is another loan already in place?

It is possible for borrowers to secure a hard money loan even if another loan is in place, although this will require either the borrower getting a new hard money mortgage to replace the existing first mortgage or qualifying for a subordinate junior loan which leaves the first mortgage in place.

How long does it take hard money lenders to fund a loan?

It generally will take a hard money lender 30 days or less to fund a loan, although some are equipped to do this in two weeks or less.

Why are bank loan interest rates so much lower than hard money lenders interest rates?

Banks can offer lower interest rates than hard money lenders because banks can fund loans via retail deposits on which they pay minimal interest rates. Hard money lenders fund loans via private capital which has higher expectations due to the greater risk of loss of principal.

How do hard money lenders differ from one another?

Hard money lenders differ from one another in a number of ways, including their lending criteria such as loan-to-cost and loan-to value guidelines; the type of real estate on which they lend; minimum and maximum loan size; the geographic region they serve; their industry reputation; and level of service which is provided.

How do hard money lenders decide how much to lend?

Hard money lenders make lending decisions based on either a Loan-to-Cost (LTC) ratio or Loan-to-Value (LTV) ratio. These ratios measure the risk of the loan by comparing the loan amount to the cost and value of the underlying real estate, respectively.

How do hard money lenders decide how much to lend?

Hard money lending tends to be localized because knowledge of the local real estate market is extremely important to enable property inspection and an understanding of actual market values and transactions.

What is the smallest size loan you will arrange?

We can make loans as small as $100,000.

What is the largest size loan you will arrange?

We can lend as high as $10,000,000.

What types of real estate properties do you lend on?

We will lend on most property types such as commercial, industrial, mix use, as well as non owner occupied residential single family homes, condominiums, townhomes and apartment buildings.

What are your LTC & LTV Thresholds?

Depending on the borrower, the collateral and overall risk we will lend up to 75% LTC of the property’s fair market value or purchase price, whichever is lower and up to 65% LTV. However, we can sometimes make exceptions to lend higher. For purchase transactions, we can lend with as little as 20% down. Every scenario is approached and annualized on a case-by-case basis.

Do you arrange loans to complete partially done completed construction projects?

Yes, we can arrange first lien mortgages for some unfinished construction or rehab projects.

Do you originate loans in junior lien/subordinate position?

Yes, every loan is analyzed and evaluated on a case by case basis. We provide bridge financing in first and junior/mezzanine position based on the borrower, borrower’s experience, the collateral and overall perceived risk.

Will you lend on a property that is on the market for sale or has recently been listed for sale?

Yes, as long as it is an investment property.

How many points do you charge for your loans?

We charge between 2 and 5 points depending on the loan amount, the type of loan, and various other factors. We are very competitive and typically our loans are less expensive than our competitors. We will provide you a written good faith estimate or conditional loan proposal.

Do your loans have prepayment penalties?

Most of our loans have a simple 6-month prepayment penalty. We suggest keeping each loan for a minimum of 12 months to avoid any added expenses.

Frequently Asked Questions (FAQ)

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