Pitbull Mortgage - Commercial Hard Money
Basics of a Hard Money Loan
Hard money loans (HMLs) are a special type of loan backed by real estate collateral.
Generally short-term loans with slightly higher interest rates, hard money loans are typically made
by private individuals or companies not affiliated with larger banks. Though few people truly
understand the hard money lending business from either a lender or a borrower's perspective, the
market represents an important opportunity for investors and borrowers alike.
A borrower usually takes out an HML loan using real estate property as collateral. The hard money
lender will provide the loan on a "loan-to-value," or LTV, basis. The "value" of a given property
is defined in the business as the amount that a lender could reasonably expect to receive from the
rapid liquidation of the real estate, should the borrower default and force a foreclosure. Generally,
the HM lender will offer cash at a 65% to 70% LTV ratio - that is, up to 65-70% of the property's
current value.
HMLs are often more expensive (that is, they carry a higher interest rate) than many other types of
bank loans because lenders often accept more risk of default in making the loan. Despite the higher
rate of interest, borrowers may find HMLs attractive for several reasons:
- They do not require the stringent standards imposed by banks
- They are less influenced by a poor credit score or rating
- They have less need for acceptable documentation
- They can be used as "bridge loans" until other financing can be obtained
- They are often faster than traditional loans
Many borrowers choose to take out HMLs because of the lower requirements to qualify.
People who face imminent foreclosure or who need money immediately often find that hard money loans
are the best - or only - option.
However, because hard money loans have substantially higher default rates than traditional loans
(due to less restrictive credit requirements), lenders usually take the first lien on the
collateralized property, in addition to attaching higher interest rates. This lien is a legal claim
to the real estate which essentially gives the lender first right for compensation from the sale
of the property if the borrower should default on the loan.
Regulation of the hard money lending business varies slightly from state to state, but laws are
generally non-specific and fairly loose, with a few notable exceptions, where limits on interest
rates are set low enough to discourage most hard money lenders from doing business.
For more information on hard money lending for mortgage brokers, visit the website
of the Pitbull Mortgage School at http://www.pitbullmortgageschool.com.
