The Syosset Plaza, 601B Jericho Tpke, Syosset NY 11791   Tel- 516.921.9000 Fax- 516.750.1200

Client / Broker Log-In

Hard Money Loans Defined

Hard Money Loans Defined - Hard Money Loans Defined

A hard money loan is a non institutional loan made by a private lender or private fund that typically lasts anywhere from 2 to 18 months and carries a higher APR than a traditional loan. Hard money loans carry a heavier burden and interest rate for the borrower for the simple reason that they also pose higher risk for the lender. Hard money loans typically require that the borrower have 25-50% equity or collateral in another piece of real estate (although some lenders will accept other assets such as stocks and bonds as
collateral for the loan).

The availability of hard money can vary from state to state. For example there are more hard money lenders in California then there are in Wisconsin.

Mobile Home lending can sometimes fall into the category of hard money loans.

These types of loans also carry a heavier burden and interest rate for the borrower for the simple reason that they also pose higher risk for the lender and are often a temporary solution that opens doors for a more permanent financial solution or exit strategy.

Hard Money loans are non institutional loans funded by private real estate investors, companies and funds - using their own money - secured by a first, second, or third Trust Deed against the
subject property.

Hard Money is a term that is used almost exclusively in the United States and Canada where these types of loans are most common. The term "Hard Money" generally infers that the borrower has actual "hard" cash invested.

The hard money industry began in the late 1950s when the credit industry in the US underwent drastic changes.
The hard money industry suffered severe setbacks during the real estate crashes of the early 1980s and early 1990s due to lenders 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.

Borrowers with a score below 720 usually find themselves locked out of the best loan rates and terms offered. Typically, borrowers with a score below 500 are locked out of the Conventional and sub prime
market altogether.

The 3 criteria you must have to qualify for a hard money loan:

1. Sufficient remaining equity in the property. (Typically 30% or more after the new loan, including points and fees. The amount of required equity for hard money loans varies by property type,
location and investor.)

2. An acceptable property in a marketable area (at the investor's discretion)

3. The ability to repay the loan to the investor (required by law)

You have a rural property, unique property, nonconforming property, or mixed-use property and have found it difficult to qualify for a conventional loan, as long as there's sufficient
equity in the property, and if the investor/hard money lender deems the property a worthwhile investment, you may qualify for a hard money loan;

Complex financing structures. The property is in the name of a "non-natural person"- such as a trust, LLC, partnership, corporation, Non-profit organizations (churches, foundations) or an entity - rather than an individual;

Purchase of Note(s)secured by Deed(s) of Trust (performing & non-performing);

Equity based loans offer an alternative to strict and narrow traditional bank (institutional, conventional) financing, thereby eliminating many of the usual qualifying, credit and income underwriting guidelines and delays of banks, mortgage companies or institutional lenders for traditional mortgage loans.

Conventional and sub prime lenders rely on a credit grade system or "FICO" score. The FICO system is a complex matrix measuring over 30 different variables in an individual's credit profile. The
FICO system converts the profile into a numeric score, which is added to an individual's credit report. That score is a reflection of the computer assigned credit risk for that individual. The intent is to reduce the amount of subjectivity underwriters (credit decision makers) inject into the risk analysis process.

There are many reasons for seeking private financing. Just to name a few:

You have bad credit, minimal credit, or NO credit- Credit Impacted: low credit scores (below 500 FICO), no credit score, poor, damaged, bad, bruised, impaired or less-than-perfect credit, limited or non-existent credit, Late Payments, Slow Pays, Consumer Credit Counseling, Collections, Charge-Offs, Repossessions, Judgments,
Tax Liens, Bankruptcy, Notice of Default, and Foreclosure. (note: tax liens, current bankruptcy, judgments, clouds on title, etc., may require resolution prior to or at closing); Sufficient equity and the ability to repay the loan are generally more important than your personal credit;

Loss of bank loans, for any reason, including, {Turn-downs, previously Declined} declines and excessive conditions;

You have a Loan(a borrower and / or a property) that falls outside the guidelines of traditional financial institutions and sub-prime lenders; Such as - Complete workouts to pay off heirs and
partners of probate estates, Estate and/or Property held in Probate (Trusts, Family Limited Partnerships, Irrevocable Trusts, corporations, etc.), Current Notice of Default/Sale, Distressed
Property Purchase, Property in Receivership, Remove an existing NOD, Tax Liens/Judgments, Other Liens (Homeowners Associations, property taxes, etc.), Foreclosure Bailout or Receivership, Bankruptcy (Old or current), Cash-out Refinance, Divorce, Medical Emergency, Unemployed, etc.

With "private lenders" the hard assets are the key.

Equity-driven mortgage loans typically require 25-50% equity in the property and/or collateral in another piece of real estate, although some lenders will accept other assets such as stocks and bonds as
collateral for the loan.

Hard Money/Bad Credit home loans are ideal for individuals who have had credit problems in the past, but need a loan for a new home purchase, mortgage refinance for their existing home, debt consolidation loan or a home equity loan. If you do not qualify for a bank loan or a subprime loan, you may still qualify for a private loan -- also known as a hard money loan or bad credit loan. Typically, you will need between 25%-50% equity in a property or other hard asset to use as collateral in order to qualify for a hard money loan. Your real estate collateral allows a private lender to feel less risk about making a loan with your low fico score (fico score below 500) and/or bad credit. Without this equity, hard money lenders will not take on this loan because of the risk that the borrower will default on the loan.

You need a short-term loan to build, rehab, or remodel real estate or make improvements to raw land prior to selling the property or refinancing into long-term permanent financing (note-hard
money loans used for these purposes require a future value appraisal and construction documentation for approval);

Property has characteristics making it difficult to obtain a bank loan, including but not limited to:

Partially or nearly completed construction of building, Property improvements- Rehab, High Vacancy - loan is needed to increase occupancy of income property, Seismic (Earthquake)
retrofitting;

Quick funding for time sensitive loans;

Hard Money/Bad credit home loans are a good fit for anyone who has income and equity to secure a loan but not the credit score to convince a bank to give them a loan. For these people, you may need to go with a private bad credit home loan lender for a 12 to 18 months period. Within the state of California, Bad Credit Lender can provide hard money loans at 11% APR and 3 points. For bad credit home loans outside of California, other rates apply. At this point, we would try to get you into a subprime loan where the home
loan rate is more competitive.

In all cases, the general qualifying process is the same: the investor/lender uses real estate as collateral. The real estate is reviewed to determine whether it holds sufficient value for the
investor/lender to be willing to take the risk of making a loan based on this collateral. The borrower's financial state and future potential is reviewed to determine the risk factors present. And finally, an exit strategy is reviewed to determine whether the loan will be completed satisfactorily within a given time frame. Depending on the results of this due diligence process, the investor /lender determines whether - and at what rates and terms - to fund the loan.

Balloon Payment Due; Refinance your initial balloon loan into a more traditional loan structure, on or near the date the balloon payment becomes due;

You are a Foreign National with no long-term U.S. employment or other assets;

Note Hypothecations(Loans secured by Assignment of Note(s) & Deed(s) of Trust);

These types of loans are referred to by many different names, such as, private money, private equity, equity, equity only, equity-based, equity-driven, or asset based.

You need a cash equity loan with less than perfect credit and have a 1st mortgage with a negative amortization feature - with the right amount of equity after the required adjustment for the potential negative amortization you may qualify for a 2nd mortgage hard money loan;

You want to remain anonymous. A borrower/investor may not want the transaction on their credit report or the mortgage in their name. Unlike most conventional financing hard money lenders do not report to credit agencies and allow title to be held by an entity or Trust;

You want to maintain your privacy. Sometimes individuals prefer to arrange private financing for reasons of privacy. For example, some people would prefer to buy a recreational property with private funds vs. institutional financing. They simply do not want their financial institution to know about all of their financial
dealings;

Creative transactions such as: interest only payments, partial deed release, and participations are usually considered;

Many hard money lenders will only lend on the first mortgage (in the industry this is known as being in the 1st-lien position). If the borrower should default on the loan, the lender is the first creditor to be paid when the property is sold. Some hard money lenders will subordinate to another 1st lien position loan; these
loans are known as HELOC loans or second lien position loans. This is a riskier position for the lender as they are the last creditor to receive remuneration.

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.

You have high debt-to-income ratios (too much debt) to qualify for a bank loan-provided you have the necessary equity in your property (or down payment) and the ability to repay the loan, our hard money lenders can make allowances for excessive debt;

You need a business loan secured by equity in real estate, but cannot qualify or wait for a conventional business, commercial, or SBA loan;

Equity lenders base their decisions on the unencumbered property value, its marketability, the borrower's exit strategy and his or her ability to repay the loan. They generally do NOT calculate debt ratios and usually do NOT take into account the borrower's credit and income. Funding is very fast; sometimes within days of receipt of the application - a true advantage over traditional bank financing.

Loan to Value on Hard Money Loans

Hard money lenders structure loans based on loan to value (LTV). The LTV for most hard money loans will not exceed 75% of the value of the property. For the purposes of determine an LTV, the word "value"
is defined as 'today's purchase price'. This amount that 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 1-4 months' time.

Unlike conventional and sub prime lenders, Hard Money Lenders rely on the equity position in the property to guide their credit decisions.

You have non-verifiable, inconsistent, or unusual income or are, Self-employed, Un-employed or Laid-off - provided you can make the loan payment, hard money lenders will accept loans made to persons who have unconventional incomes. If you have no income or means of repaying the loan, you might not qualify for a hard money loan;

Hard money loan is an equity driven loan.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email mwilliams@northshorefunding.com.