Hard Money Loans
|Loan Structure | History |
Cross Collateralizing a Hard Money Loan | Commercial
Commercial Hard Money Lender
or Bridge Lender Programs | Legal & Regulatory
Commercial Lending Industry | Hard
Money Rate | Interest Rate on Hard Money
| Hard Money Points
|Other Similar Loans: Asset Based Loan | Private
Money | Bridge Loan | Non Conforming
hard money loan is a specific type of financing
in which a borrower receives funds based on the value of a specific
parcel of real estate. Hard money loans are typically issued
at much higher interest rates than conventional commercial or residential
property loans and are almost never issued by a commercial
bank or other deposit institution.
Hard money is similar to a bridge loan which usually
has similar criteria for lending as well as cost to the borrowers.
The primary difference is that a bridge loan often refers to a commercial
property or investment property that may be in transition and not
yet qualifying for traditional financing. Whereas hard money
often refers to not only an asset-based loan with a high interest
rate, but can signify a distressed financial situation
such as arrears on the existing mortgage or bankruptcy and foreclosure
proceedings are occurring.
A hard money loan is a species of real estate loan collateralized
against the quick-sale value of the property for which the loan
is made. Most lenders fund in the first lien position,
meaning that in the event of a default, they are the first creditor
to receive remuneration. Occasionally, a lender will subordinate
to another first lien position loan; this loan is known as a mezzanine
loan or second lien.
Hard money lenders structure loans based on a percentage of the
quick-sale value of the subject property. This is called the loan-to-value
or LTV ratio and typically hovers between 60-70%
of the market value of the property. For the purpose of determining
an LTV, the word "value" is defined as "today's purchase
price." This is the amount a lender could reasonably expect
to realize from the sale of the property in the event that the loan
defaults and the property must be sold in a one- to four-month timeframe.
This value differs from a market value appraisal, which assumes
an arms-length transaction in which neither buyer nor seller is
acting under duress.
Below is an example of how a commercial real estate purchase might
be structured by a hard money lender:
- 65% Hard money (Conforming loan)
- 20% Borrower equity (cash or additional collateralized
- 15% Seller carryback loan or other subordinated
History of Hard Money
Hard Money is a term that is used almost exclusively in the
United States and Canada where these types of loans are most common.
In commercial real estate, hard money developed as an alternative
"last resort" for property owners seeking capital against
the value of their holdings. The industry began in the
late 1950s when the credit industry in the US underwent drastic
changes (see FDIC: Evaluating the Consumer Revolution).
The hard money industry suffered severe setbacks during the real
estate crashes of the early 1980s and early 1990s due to lenders
overestimating and funding properties at well over market value.
Since that time, lower LTV rates have been the norm for hard money
lenders seeking to protect themselves against the market's volatility.
Today, high interest rates are the mark of hard money loans as a
way to protect the loans and lenders from the considerable risk
that they undertake.
Cross Collateralizing a Hard Money Loan
| In some cases the low loan to values do not facilitate a loan sufficient
to pay the existing mortgage lender off in order for the hard money
lender to be in first lien position. Because securing the property
is the basis of making a hard money loan, the first lien position
of the lender is usually always required. As an alternative to a potential
shortage of equity beneath the minimum lender Loan To Value guidelines,
many hard money lender programs will
allow a "Cross Lien" on another of the borrowers properties.
The cross collateralization of more than one property on a hard money
loan transaction, is also referred to as a "blanket mortgage".
Not all homeowners have additional property to cross collateralize.
Cross collateralizing or blanket loans are more frequently used with
investors on Commercial Hard Money Loan programs.
Commercial Hard Money
| Commercial hard money is similar to traditional hard money, but
may sometimes be more expensive as the risk is higher on investment
property or non-owner occupied properties. Commercial Hard
Money Loans may not be subject to the same consumer loan safeguards
as a residential mortgage may be in the state the mortgage is issued.
Commercial hard money loans are often short term and therefore interchangeably
referred to as bridge loans or bridge financing.
Commercial Hard Money Lender or Bridge Lender Programs
Commercial Hard Money Lender and Bridge Lender programs are
similar to traditional hard money in terms of loan to value requirements
and interest rates. A commercial hard money or bridge lender will
usually be a strong financial institution that has large deposit
reserves and the ability to make a discretionary decision on a non-conforming
loan. These borrowers are usually not conforming to the
standard Fannie Mae, Freddie Mac or other residential conforming
credit guidelines. Since it is a commercial property, they
usually do not conform to a standard commercial loan guideline either.
The property and or borrowers may
be in financial distress, or a commercial property may simply not
be complete during construction, have it's building permits in place,
or simply be in good or marketable conditions for any number of
Some Private Investment groups or Bridge Capital Groups will require
joint venture or sale-lease back requirements to the riskiest transactions
that have a high likelihood of default. Private Investment
groups may temporarily offer bridge or hard money, allowing the
property owner to buy back the property within only a certain time
period. If the property is not bought back by purchase
or sold within the time period they Commercial Hard Money Lender
may keep the property at the agreed to price.
Traditional Commercial Hard Money loan programs are very high
risk and have a higher than average default rate. If the property
owner defaults on the commercial hard money loan, they may lose
the property to foreclosure. If they have exhausted bankruptcy previously,
they may not be able to gain assistance through bankruptcy protection.
The property owner may have to sell the property in order to satisfy
the lien from the commercial hard money lender, and to protect the
remaining equity on the property.
Legal & Regulatory Issues
| From inception, the hard money field has always been formally
unregulated by state or federal laws, although some restrictions
on interest rates (usury laws) by state governments restrict the rates
of hard money such that operations in several states, including Tennessee
and Arkansas are virtually untenable for lending firms.
Commercial Lending Industry
Thanks to freedom from regulation, the commercial lending industry
operates with particular speed and responsiveness, making it an
attractive option for those seeking quick funding.
However, this has also created a highly
predatory lending environment where many companies
refer loans to one another (brokering), increasing the price and
loan points with each referral.
There is also great concern about the practices of some lending
companies in the industry who require upfront payments to investigate
loans and refuse to lend on virtually all properties while keeping
this fee. Borrowers are advised not to work with hard money
lenders who require exorbitant upfront fees prior to funding in
order to reduce this risk. If you feel you have been the
victim of unfair practices, contact your state's attorney general
office or the office of the state in which the lender operates.
Hard Money Rate
| Hard Money Mortgage loans are generally more expensive than traditional
sub-prime mortgages. However all mortgage loans are not necessarily
considered to be a high cost mortgage. Generally a hard money loan
carries additional risk that a borrower is aware of. Rather
than selling the property a borrower will opt to keep the loan and
if a lender is willing to assume some of the risk by offering a hard
Interest Rate on Hard Money
| The rate is not dependent on the
Bank Rate. It is instead more dependent on the real
estate market and availability of hard money credit. Currently
and for the past decade hard money has ranged from the mid 10% to
16% range. When a borrower defaults they may be charged a
higher "Default Rate". That rate can be
as high as allowed by law which may go up to or around 25%-29%.
Hard Money Points
| Points on a hard money loan are traditionally 1-3 more than a traditional
loan, which would amount to 3-6 points on the average hard money loan.
It is very common for a commercial hard money loan to be upwards
of four points and as high as 10 points. The reason a borrower
would pay that rate is to avoid imminent
foreclosure or a "quick
sale" of the property. That could amount to as
much as a 30% or more discount as is common on short sales. By taking
a short term bridge or hard money loan, the borrower often saves equity
and extends his time to get his affairs in order to better manage
All hard money borrowers are advised to use a professional real estate
attorney to assure the property is not given away by way of a late
payment or other default without benefit of traditional procedures
which would require a court judgment.
Other Types of Similar Loans
- Asset Based Loan – A similar type of
commercial loan based on real estate, indicating the loan will
be based upon a percentage of the properties appraised value,
as the key criteria.
- Private money – Refers to lending money
to a company or individual by a private individual or organization.
- Bridge Loan – A similar type of commercial
loan based on real estate.
- Non Conforming Loans – loans for non-conforming
- Commercial Loan – Standard, broad types
of loans based on commercial property value.
An asset-based loan is a short-term loan secured by a company's
assets. Real estate, A/R, inventory, and equipment are typical assets
used to back the loan. The loan may be backed by a single category
of assets or some combination of assets, for instance, a combination
of A/R and equipment.
True asset based or "Equity
based" lending is easier to obtain for
borrowers who do not conform to typical lending standards.
- They may have no, little or terrible credit.
- They may have little income to support the payments, and may
need to rely on the loan itself to pay back the lender until the
property is either sold, refinanced, or their income resumes.
- They may also have little or no down payment on a large commercial
purchase transaction, as would otherwise be required, because
they are buying it under value.
- They may have struck a deal with the seller to lend them the
remaining balance of the purchase price, not covered by the first
Percentage of Appraised Value
Asset based lenders typically limit the loans
to a 50 or 65 loan to value ratio or "LTV". For example:
If the appraisal is valued at $1,000,000.00 a lender might lend
between $500,000.00 and $650,000.00.
A borrower is more likely to default with little or no down payment,
and has little invested making it easier to "walk away"
from the deal if it does not go well. In the event of a default
resulting in a foreclosure, the first lien position lender is entitled
to repayment first, out of the proceeds of the sale. Exceptions
may occur in the event of a "short sale", where the property
is overvalued and actually sells for less, and does not cover the
loan. The lender can than sue the borrower for the remaining
balance if it can be obtained. An asset based lender knows that
and usually will feel content that at an average 60 LTV they have
enough equity to use to cover any expenses incurred in the event
of a default.
These expenses would include:
- Past due interest on the loan they have given
- Past due property taxes on the property if the borrower has
stopped paying them also
- Lawyer's fees
- Miscellaneous credit and collection fees associated with foreclosure.
Allowing secondary financing is common on asset based lending
programs. Asset based lenders may allow this, if they are content
with the amount of equity remaining beyond their lien position (often
Some asset based lenders will allow a second mortgage from another
lender or seller to occur up to the full amount of the properties
value, while others may restrict secondary financing to a specific
Combined Loan-To-Value or "CLTV". For example while they
may lend at a 50 Loan to Value Ratio of the property value, they
may allow secondary financing from another party for up to the full
value, otherwise stated as 100 Combined Loan To Value Ratio. They
may in some cases require that the borrower have at least 5% or
more of their own funds…which would be expressed as a CLTV
of 95. That would allow for up to 45% of the value to be financed
by a secondary lender. The secondary lender is at a higher risk.
A seller might take the chance in order to facilitate the sale of
his property quickly and/or at full price.
Private Money is a commonly used term in banking and finance.
It refers to lending money to a company or individual by a private
individual or organization. While banks are traditional sources
of financing for real estate, and other purposes, private money
is offered by individuals or organizations and may have non traditional
Private money can be similar to the prevailing rate of interest
or it can be very expensive. When there is a higher risk associated
with a particular transaction it is common for a private money lender
to charge a rate of interest above the going rate.
Private money lenders
There are private money lenders in virtually every state
in the United States, seeking a chance to earn above average rates
of return on their money. With that comes the risk that a private
money loan may not be re-paid on time or at all without legal action.
Private money is offered to Client in many cases in which the banks
have found the risk to be too high.
Private money regulation
Private money lenders must comply with state and federal
usury laws. They are not exempt from banking laws. Further, if the
loan is made to a consumer, the private money lender may have a
limit on how many loans they may make in a particular state, without
being required to have a banking license.
A bridge loan (also known in some
applications as a swing loan) is a type of short-term
loan, typically taken out for a period of 2 weeks to 3 years pending
the arrangement of larger or longer-term financing.
A bridge loan is interim financing
for an individual or business until permanent or the next stage
of financing can be obtained. Money from the new financing
is generally used to "take out" (i.e. to pay back) the
bridge loan, as well as other capitalization needs.
Bridge loans are typically more expensive than conventional financing
because of a higher interest rate, points and other costs that are
amortized over a shorter period, and various fees and other "sweeteners"
(such as equity participation by the lender in some loans). To compensate
for the additional risk the lender may require cross-collateralization
and a lower loan-to-value ratio. On the other hand they are typically
arranged quickly with relatively little documentation.
In real estate
Bridge loans are often used for commercial real estate
purchases to quickly close on a property, retrieve real estate from
foreclosure, or take advantage of a short-term opportunity in order
to secure long term financing. Bridge loans on a property are typically
paid back when the property is sold, refinanced with a traditional
lender, the borrower's creditworthiness improves, the property is
improved or completed, or there is a specific improvement or change
that allows a permanent or subsequent round of mortgage financing
to occur. The timing issue may arise from project phases with different
cash needs and risk profiles as much as ability to secure funding.
A bridge loan is similar to and overlaps with a hard money loan.
Both are non-standard loans obtained due to short-term, or unusual,
circumstances. The difference is that hard money refers to the lending
source, usually an individual, investment pool, or private company
that is not a bank in the business of making high risk, high interest
loans, whereas a bridge loan refers to the duration of the loan.
Bridge loan interest rates are usually 12-15%, with typical terms
of up to 3 years. 2-4 points may be charged. Loan-to-value ratios
generally do not exceed 65% for commercial properties, or 80% for
residential properties, based on appraised value.
A bridge loan may be closed, meaning it is available for a predetermined
timeframe or open in that there is no fixed payoff date (although
there may be a required payoff after a certain time).
Most banks do not offer real estate bridge
loans because the speculative nature, risk, lack of full documentation,
and other factors, do not fit the bank's lending criteria.
A bank that issued bridge loans might have difficulty justifying
its lending practice to its investors and government regulators.
Bridge loans are therefore more likely to come from individuals,
investment pools, and businesses that make a practice of the higher-interest
- A bridge loan is often obtained by developers
to carry a project while permit approval is sought. Because
there is no guarantee the project will happen, the loan might
be at a high interest rate and from a specialized lending source
that will accept the risk. Once the project is fully entitled,
it becomes eligible for loans from more conventional sources that
are at lower-interest, for a longer term, and in a greater amount.
A construction loan would then be obtained to take out the bridge
loan and fund completion of the project.
- A consumer is purchasing a new residence and plans to make
a down payment with the proceeds from the sale of a currently
owned home. The currently owned home will not close until after
the close of the new residence. A bridge loan allows the buyer
to take equity out of the current home and use it as down payment
on the new residence, with the expectation that the current home
will close within a short time frame and the bridge loan will
A non-conforming loan
is a loan that fails to meet bank criteria for funding.
Reasons include the loan amount is higher than the conforming loan
limit (for mortgage loans), lack of sufficient credit, the unorthodox
nature of the use of funds, or the collateral backing it. In many
cases, non-conforming loans can be funded by hard money lenders,
or private institutions/money. A large portion of real-estate loans
are qualified as non-conforming because either the borrower's financial
status or the property type does not meet bank guidelines. Non-conforming
loans can be either A-paper or sub-prime loans.
The flexibility of private money can allow for a much wider range
of deals to be funded, although more detailed and substantive collateral
and documentation may be required by a lender.
Selecting a Non-Conforming Lender
Borrowers should select non-conforming lenders in the same careful
way they would shop for any other loan. Look for good rates and
especially a good customer service rating. Rates
for non-conforming lenders are typically higher than those for banks,
but terms are more flexible and loans more easily attainable.
Many companies advertising non-conforming loans are brokers who
refer the loans requests they field to lenders.
Types of Non-Conforming Loans
loans are also known as hard money loans, and comprise a large portion
of all non-conforming loans. They are used to fund industrial and
retail projects like RV parks, theatre complexes, gas stations,
medical centers and more. Many commercial non-conforming loans are
loans are strictly regulated, usually with much higher rates than
banks. Some states have legal limits against non-conforming loans
for residential real estate.