Hard Money Loan
A Hard Money Loan is a loan in which real estate serves as the
collateral asset. The hard money loan is usually from a
private lender.
A hard money loan is a specific type of asset-based loan financing in which a
borrower receives funds secured by the value of a 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 does not yet qualify for traditional financing, whereas
hard money often refers to not only an asset-based with a high
interest rate, but possibly a distressed financial situation, such as arrears on the existing
mortgage, or where bankruptcy and foreclosure proceedings are occurring.
Many hard money mortgages are made by private investors, generally in their local areas. Usually
the credit score of the borrower is not important, as the loan is secured by the value of the
collateral property. Typically, the maximum loan to value ratio is 65-70%. That is, if the
property is worth $100,000, the lender would advance $65,000-70,000 against it. This low LTV
provides added security for the lender, in case the borrower does not pay and they have to
foreclose on the property.
Loan Structure
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 real estate)
15% Seller carryback loan or other subordinated (mezzanine) loan.
