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:
Hard Money Loans are commonly found in situations where the borrower:
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.
Hard money loans can have a number of advantages over traditional bank financing including:
Disadvantages of seeking a hard money loan may include:
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.
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.
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.
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.