Importantly, hard money loans are not for first time home buyers. Hard money loans are typically loans of “last resort” for borrowers who can’t find a conventional loan to accomplish the debt bridge between the down payment and the purchase price of real estate. Hard money loans have sharply higher interest rates and usually are expensive to originate – much greater than traditional real estate financing. Hard money loans are often used to bridge financing between undeveloped land and construction or to take advantage of a great deal that has to close quicker than they could get traditional financing.
To qualify for a hard money loan lenders may look to other properties to secure the debt utilizing a practice called cross-collateralizing. This is because commonly the property that the debt is tied to usually is not valued as much as the lender requires and thus the lender wouldn’t be secured in their position unless another piece of property was also on the hook.
The Origin Of Hard Money Loans Goes Back To The 1950s When The Credit Markets And Industry Were Upside Down
Hard money loans first cropped up in the 1950s when the United States credit market and industry underwent significant changes. The hard money industry also suffered severely during the real estate struggles in the 1980s and early 1990s. This was primarily due to lenders overestimating values of properties used for collateral. Since these periods lower loan to value (LTV) ratios have been implemented to protect against market volatility. Because these type loans are expensive hard money lenders also receive difficult reviews from customers and the traditional loan industry.
What Qualifies For Hard Money Loans?
The lending criteria varies widely from lender to lender. A borrower’s credit, income stream, and typical lending data points are used, however, lenders are really looking at the value of the property being secured. Moreover, hard money lenders won’t typically lend more than 65-75% of the value of the property allowing the hard money lender ample security in the event of borrower default. Most hard money lenders look to the quick loan to value LTV ratio of the property which really means the “quick sale” or “today’s purchase price of the property.”
Hard money loans also cost points between 1 to 3 percent more than a traditional loan, or 3 to 6 points on a typical hard money loan. The added costs of these loans are due to risk, the speed and swiftness of availability, and the creditworthiness of the borrowers. Also, sometimes borrowers come across deals where quick money is the only way to purchase a property and the borrower is already over leveraged.
Commercial Hard Money Lenders Are Even More Expensive
Commercial hard money is similar to traditional hard money, but usually is more expensive as the risk is higher on investment property or non-owner occupied properties held for investment. Typically commercial hard money loans are often short-term and sometimes called “bridge financing.”
Commonly private investment groups or “bridge capital” groups will require a borrower to form a joint-venture with the lender, or require a sale-lease back because these transactions are risky and have a high rate of default. These groups will offer the borrower temporary or bridge money allowing the owner to buy back the property within a short period of time. If the property is not bought back or sold with the time period stated the lender may keep the property at the agreed price. The lender then usually sells the property to recoup their investment.
Regulations Are Limited For Hard Money Loans – Recourse In Civil Court
Only usury and civil laws dictate the rights and wrongs of hard money loans. The industry is fairly unregulated which allows the market to operate with speed and swiftness – which is an attractive alternative for borrowers who can’t qualify for traditional products. Because the regulations are limited usually the only recourse a borrower has against an overbearing lender is court action.
Hard Money Loans Are Not For Everyone – Especially First Time Home Buyers
Hard money loans are very specific products usually for sophisticated investors and speculators – not for first time home buyers. These products are expensive and are not for the faint of heart. If you come across a real estate transaction where this type of product is necessary please consult a real estate professional or a real estate attorney before moving forward with the closing. If you have specific questions about these products or any real estate related deals/questions please give me a call.