8 Key Facts You Need to Know About Hard Money Loans

David Cohn
Jun 11, 2021
Hard Money Loans

If you’re interested in commercial real estate investing, then you’ve probably heard of hard money loans. And like many new investors, this type of financing might seem complicated—even scary—if you have never used it before.

But there’s nothing to fear. Hard money loans are popular with seasoned CRE investors who understand how best to utilize them to grow their portfolios. It can be beneficial in many investing situations despite relatively higher rates and fees.

Defining hard money loan

A hard money loan is an alternative to a traditional mortgage for borrowers who don’t qualify for a conventional property loan.

  1. Need access to investment capital right away.
  2. We are planning to hold on to the new commercial property only for a short time.

Traditional lenders like banks typically don’t issue hard money loans. This type of financing is available from private investors or corporations. Because they come from private funding, hard money loans are usually more flexible in risk assessment and terms.

Where does it get its bad reputation?

Private hard money lenders were first issued in the 1950s. It used to be that this type of financing was the absolute last resort for borrowers.

But this is no longer the case. Hard money lending in commercial real estate has gone mainstream.

These days, even the most prominent CRE investors use this type of loan to get quick access to capital and take advantage of great investment opportunities that are time-sensitive and cannot wait for traditional funding.

Is it the same as bridge loans?  

No. Hard money loans are sometimes confused with ‘bridge loans,’ and it’s not uncommon for CRE industry professionals to use them interchangeably. But while they are similar, they are not precisely the same.

Commercial Bridge loans refer to ‘temporary’ or ‘transition’ investment property loans that allow the borrower to bridge the gap until they can find a longer-term, permanent financing solution.

On the other hand, hard money loans are more often used to deal with bankruptcies, foreclosures, and delinquent mortgages.

8 Things you need to know about hard money loans

If you’re interested in hard money financing, it’s essential to understand some of the basics behind this type of loan.

Here are eight essential facts to keep in mind if you want to develop a better understanding of hard money loans and decide if they are the best option for a given situation:

1. Fast loan application and approval

One of the most significant selling points of hard money loans is their much easier to apply for. There are no complex bank regulations to follow, and document area requirements are also quite simple.

These types of loans close in 7 to 10 days, but it is possible to get approved in just 24 hours, especially if you have previously done business with a lender before.

This is why it’s essential to have a good relationship with a hard money lender specializing in financing commercial investment properties.

2. Higher interest rates

Because hard money loans are much riskier for lenders than traditional mortgages, the interest charged on this kind of financing is higher. You can also expect the terms to be short (usually less than 12 months). Should a default occur, the interest rate can soar even further. You also have to be aware of prepayment penalties.

3. What lenders look for

Hard money loans are not based on a borrower’s equity, assets, or credit rating.

While lenders indeed consider these factors, there more concerned about the primary collateral—that is, the property you want to purchase using the funds.

This is why it’s important to have a good business plan for the CRE asset that you wish to buy. Lenders will want to know what you intend to do with it and if they can get their money back quickly.

As a borrower, you also need to prepare the following information for your application:

  • Property purchase price
  • Location
  • Recent inspection data an appraisal
  • Estimated renovation expenses
  • Planned resale price
  • Your experience in the commercial real estate industry

4. Lower loan-to-value (LTV) ratio

The ‘value’ component in the LTV ratio of hard money loans is somewhat lower compared to the same property’s value as determined by banks.

It’s based on what the lender can reasonably expect to get if they sell are forced to seize and sell the property quickly if the borrower defaults.

The LTV ratio often ranges from 60% to 75% of the total value of the property.

5. Point rates

Point rates are charged on top of the basic interest rate. A ‘point’ refers to 1% of the total principal. Hard money lenders typically add anywhere from 3 to 6 points, which is higher than the 1 to 3 points added to traditional bank mortgages.

6. First-lien position

Should the borrower default on the loan, lenders have a first-lien position, which means that they are always paid first from the foreclosure sale proceeds?

There are rare instances when lenders are willing to take a second inline position, in which case the loan is categorized as a ‘mezzanine loan.’

7. Most common uses

Many property investors use hard money to get quick funding to flip a property. They use the funds to purchase and renovate a commercial real estate asset to resell it for a higher price.

For these kinds of investors, a short-term loan like hard money financing is ideal because they’re going to hold the property for just a few months and can pay off the loan once the property is sold. In this case, lenders will look at both the present and after repair value of the property before approving the loan.

Hard money loans are also used to save distressed properties from foreclosure and fixed distressed mortgages.

8. What happens if the borrower defaults

Hard money lenders have the option to foreclose on the property if the borrower defaults on the payments. That said, most lenders want to avoid such a scenario. They may be willing to negotiate with borrowers who have valid reasons for struggling to make their payments.

Explore hard money options here at Capital Investors Direct

Do you need a hard money loan?

We provide access to commercial real estate investment capital for a long list of property types, including apartment complexes, retail, mixed-use, and office spaces located in the top 200 MSA Tier I and II cities.

Capital Investors Direct provides hard money loans in all 50 states plus Puerto Rico and the US Virgin Islands. Call 800.348.8120 to learn more about how we can help you.