A hard money lender in the world of real estate is a lending company, or a group of investors who have joined with the purpose of providing funding to brokers, construction development companies, real estate investment firms, or commercial real estate property owners. This type of loan is is based on a collateral, generally property, that has a real, hard value.
The amount of the loan can range between 60% and 80% of the asset's current market value (or 50 to 70% of 'after repaired' value), but will rarely exceed this range as the funding group must be able to realize a profit, should the sale of the property become necessary. In most cases, the hard money lender takes up first lien position in the order of liens against the property, and would become the first entity to be satisfied in the event of any sale.
The amount of the loan can range between 60% and 80% of the asset's current market value (or 50 to 70% of 'after repaired' value), but will rarely exceed this range as the funding group must be able to realize a profit, should the sale of the property become necessary. In most cases, the hard money lender takes up first lien position in the order of liens against the property, and would become the first entity to be satisfied in the event of any sale.
What's different about a hard money loan?
There are several differences between hard money loans and other types of loans. First of all, conventional lending criteria may be used to qualify a borrower, but as often as not, these criteria are ignored altogether; the over-riding criterion for qualification will always be the value of real estate used as collateral, which makes other qualifications pretty much immaterial.
Another difference often encountered in a hard money loan is a somewhat higher interest rate than what would normally be charged in a traditional commercial property loan. These loans typically involve higher risk and are structured to cover a shorter period of time, which justifies the higher interest rate, and provides a small measure of security for the funding investors.
A third difference between hard money loans and other commercial property loans is that the investment property used as collateral might not yet be in a stage of completion that is considered acceptable by traditional lenders. This kind of situation might not appeal to a bank or other traditional lender, but might be considered by a hard money lender.
When to turn to a hard money lender
Many hard money lenders have a genuine interest in the development of a community and are glad to help with its growth. You should pursue a funding partnership with a hard money lender that has this kind of interest in community development.
Of course, there are also some financially-based reasons for establishing this kind of funding relationship:
If your real estate asset is in a stage of completion that would not qualify for a loan from a bank or other commercial investor, it might still be sufficient as a hard asset to qualify for a hard money loan. It is also even possible to qualify for a hard money loan if your real estate asset is under distressed circumstances, e.g. a foreclosure action is pending, or your firm itself is experiencing financial distress.
While it may not always be true, in some situations, hard money lenders can actually be the 'knights in shining armor' that can rescue you from a financial disaster.
There are several differences between hard money loans and other types of loans. First of all, conventional lending criteria may be used to qualify a borrower, but as often as not, these criteria are ignored altogether; the over-riding criterion for qualification will always be the value of real estate used as collateral, which makes other qualifications pretty much immaterial.
Another difference often encountered in a hard money loan is a somewhat higher interest rate than what would normally be charged in a traditional commercial property loan. These loans typically involve higher risk and are structured to cover a shorter period of time, which justifies the higher interest rate, and provides a small measure of security for the funding investors.
A third difference between hard money loans and other commercial property loans is that the investment property used as collateral might not yet be in a stage of completion that is considered acceptable by traditional lenders. This kind of situation might not appeal to a bank or other traditional lender, but might be considered by a hard money lender.
When to turn to a hard money lender
Many hard money lenders have a genuine interest in the development of a community and are glad to help with its growth. You should pursue a funding partnership with a hard money lender that has this kind of interest in community development.
Of course, there are also some financially-based reasons for establishing this kind of funding relationship:
- Probably the most important of these is having a hard asset that has sufficient value to generate the amount of cash you need.
- If your credit history would trip you up and disqualify your application for a traditional loan, this might be another time that a hard money lender becomes an option.
- When you need a fast turnaround loan because of impending deadlines in construction, this kind of loan may also make sense because it can typically be arranged much faster than a traditional loan.
If your real estate asset is in a stage of completion that would not qualify for a loan from a bank or other commercial investor, it might still be sufficient as a hard asset to qualify for a hard money loan. It is also even possible to qualify for a hard money loan if your real estate asset is under distressed circumstances, e.g. a foreclosure action is pending, or your firm itself is experiencing financial distress.
While it may not always be true, in some situations, hard money lenders can actually be the 'knights in shining armor' that can rescue you from a financial disaster.