Hard money loans are loans intended
to be used for a short period time between the initial requirement
for funds and a permanent, usually less costly, financial solution.
The term hard money refers to money that is lent based on the value
of real estate. Hard money loans carry higher costs and shorter terms
than traditional bank mortgages and are used for specific business
purposes. On the positive side, hard money loans collateralized by
real estate are also characterized by their ability to be completed
and funded in a very short period of time and with relatively little
paperwork and preparation efforts.
Hard money loans are needed when
an immediate need arises, such as:
Real estate purchases – Hard money loans are excellent resources
for the purchase of real estate that requires a very short close timeframe.
For example, an excellent purchase price on real estate is available,
but obtaining it requires closing within a very short period of time
– such as when the real estate is in danger of foreclosure, a
“bidding war” makes a fast closing an advantage, the seller
requires instant cash but appropriate long term funding will take
time, etc.
Retrieving real estate from foreclosure
Business loans – Hard money loans collateralized with real estate
can provide operating capital for businesses in as little as two weeks.
Hard Money Lenders
There about a dozen or two major direct
hard money lenders in the US. Smaller private investors may also provide
lending for hard money loans. They tend to serve a specific locale
or region and can be difficult to identify and verify. Almost all
the advertisements for hard money loans – or for that matter,
any type of non-bank generated business funding – direct you
to brokers, not direct lenders. Many web sites carry claims that the
company is both a direct hard money lender and a broker. Truth be
told, they will almost always be serving in the broker capacity, not
as a direct hard money loan lender.
Brokers & Direct Lenders
The hard money financial sector is one
of the least regulated financial sectors in the US today. Fraud and
deception abound. Therefore, it is important to perform sufficient
research to determine if the broker or direct lender is a company
you can trust to do business with. Here are some guidelines to look
for in order to obtain the most advantageous bridge loan:
Hard Money Direct Lenders
A direct lender is not a broker. This
is the company that actually writes the check and funds the loan.
There are several ways that direct hard money loan lenders are funded
(see below), but the important thing is that when you bring your loan
request to them, they do not in turn ‘float’ your loan among
direct lenders around the country in an effort to get your loan funded.
Rather, direct lenders use internal money to fund your loan.
Institutional Funding
The term institutionally funded means
that you working with a direct loan funding company who already has
the money to fund the loan in their possession. Many direct lenders
are funded by investors. These financially qualified individuals invest
in hard money loans on a case by case basis. When you or your broker
contacts the lender, your paperwork is then ‘translated’
by the loan officers in that company into a prospectus for their investors
who then decide whether they want to invest. Once sufficient funds
have been accrued, your loan is funded. This can take just a few hours
or weeks to accomplish.
An institutionally funded direct lender
is funded by banks, retirement funds, and/or other such institutions.
They may have one or more funding sources, but the funds are already
available and at their disposal to fund hard money loans based on
the criteria set forth. Since an institutionally funded hard money
loan lender does not need to turn to individual investors for each
loan, your loan can fund, depending on whether all your other criteria
are order, in a week or two!
Hard Money Brokers
Although it may be less expensive to
work with a direct lender, it may not be expedient. Like a good real
estate broker, knowledgeable hard money loan brokers may be valuable
to you. When selecting a broker, ask for references from people and
companies he/she has already worked with. Ask about commission –
the compensation you will pay them for their services. An honest broker
will tell you that their commission ranges from 1 – 4 or 5% (the
points you pay), depending on whether they share your project with
other brokers. This is not an unreasonable compensation for the work
they may perform. A knowledgeable broker will know the direct lenders
that handle your kind of project. Remember, each direct lending company
sets its own criteria. They will help you understand the documentation
you will need to provide and review your package to be sure that your
loan will progress smoothly.
Hard Money Criteria
Hard money loan criteria varies from
one lender to another. The more ‘flexible’ the lender is
about the terms, LTV (loan to value),
financial qualifications, etc., the higher the risk to the lender
and therefore the higher the rates you will pay. If you have a loan
that is a near bank deal, which means a loan your local bank almost
said “Yes” to, but it didn’t match their qualifications
for one reason or another – or the bank simply couldn’t
fund your loan quickly enough to suit your needs, then you should
work with a company that specializes in that kind of loan and charges
suitably lower rates than most hard money lenders.
Questions
Contact Allie
Mae with any questions regarding hard money loans.
