Hard money is often viewed as the most expensive kind of commercial loan. Many borrowers shy away from hard money because the terms are often “hard to swallow.” This article debunks some of the misunderstandings surrounding hard money loans and shows you some great hard money programs that may be the right solution for you.
What is Hard Money?
Hard money is a term used primarily in the United States and Canada to refer to asset-based lending that is secured by commercial (or residential) real estate. This type of loan is most generally used for financially distressed situations such as low or no cash flow, or mortgage in arrears or foreclosure.
Who can lend Hard Money?
Hard money lending is generally a less regulated sector of commercial lending governed only by state usury laws. Therefore, a hard money lender can actually be a broker who may have to go out and raise the money they intend to lend. Direct hard money lenders are fully funded, do their underwriting in-house and can close very quickly.
How does a Hard Money Loan work?
Like any other commercial loan program, a hard money loan begins with an inquiry from a borrower or broker, followed by an overview of the project and loan request, including:
- A loan intake or application form
- An executive summary
- Photos of the property
- Rent rolls (if tenant occupied)
- YTD Profit & Loss
- Recent Appraisal, if available.
Notice that the initial “package” is all about the property and not the borrower. This is one of the key differences between conventional commercial lending and hard money. With hard money, the asset qualifies for the loan and the borrower’s financial position is secondary.
Does the property have to have cash flow to qualify?
This is another key difference between conventional commercial lending and hard money–the property can have little or no cash flow and still qualify based on the value of the asset. Hard money lenders will often take into account both the “as is” value of the property and the “as stabilized” value, in order to assess the upside potential. If there is enough room in the deal (loan to value), a hard money lender may allow interest reserves to be included in the loan for a period of time to renovate or stabilize the property.
How much money can I borrower with a Hard Money Loan?
Generally the amount of money you can borrower is determined by a maximum loan to value (LTV) based on a current appraisal. Hard money loans usually cap at 60% or 65% LTV, depending on the lender, the type of property, the location and condition of the property. If the property needs to be renovated or needs time to be leased up, some hard money lenders calculate the LTV based on a completion value or stabilized value.
What are typical Hard Money terms?
Here’s a little-known secret of hard money lending. Most hard money lenders base their risk decision on the total APR of the loan. (The annualized percentage rate.) A typical hard money loan might have a 10-15% interest rate, often with interest only payments, and 5-10 origination points to the lender. Since these are the two largest expense items when it comes to the cost of the loan, if you simply add together the interest rate and points (for example, 10 + 5) you get an approximate APR on the loan. (In this example, the APR is about 15.) If you want a more precise calculation, add in any closing costs that are included in the loan and any repayment to yourself of initial expenses (excluding the appraisal and other third-party payments.)
Why are Hard Money interest rates and points so high?
First, there’s a reason for high origination points on hard-money loans. This is to give the lender some buffer to offset the risk of a default on the loan. Secondly, there is a risk/reward trade-off that is reflected in the interest rate. In general, the higher the perceived risk (to the lender,) the greater the reward. Finally, hard money loans tend to be relatively short-term (generally 1-2 years.) With a conventional mortgage, the lender gains over the long-term from mortgage payments that buy down the loan principal as well as paying the interest expenses. With hard money, there is generally no buy-down of principal due to the short term nature of the loan.
How can a Hard Money Loan help me?
The chief reasons a commercial borrower might seek a hard-money loan are:
- No cash flow currently
- The property needs to be renovated
- The property was just built and needs time to be fully leased out
- The current lender is calling their loan due
- The property is in foreclosure proceedings
- There is a purchase situation with a tight timeframe
These are some of the most prevalent situations where a hard money loan is a good solution.
What’s the difference between hard money and a bridge loan?
Some borrowers (and lenders) use these terms interchangeably, but there are a couple of important differences. First of all, hard money loans generally have no pre-payment penalty. That means, while they are expensive to get into, they are also easy to get out of. Bridge loans often have a pre-payment penalty if the borrower refinances in the first year or two, which makes the true cost of the loan higher than the interest rate alone would indicate. Secondly, hard money loans are generally the fastest to close. Some hard money lenders can close in 10 days, based on a solid appraisal, or sometimes even a broker’s price opinion and no appraisal, if the LTV is low enough. Bridge loans tend to need the borrower to qualify as well as the property, and may take 30 days or more to close.
How can I get started?
Send an inquiry to Sofia Capital Ventures with the following information:
- Your name and contact information
- The property address
- Type of commercial property
- Loan amount needed
- Property Value
- Occupancy level (if applicable)
Be sure to include any other pertinent information about your situation and the timeframe you need to close. We will get back to you right away.