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.
