The Basics Of Hard Money Loans

A hard money loan is defined as an asset-based loan in which a borrower receives funds in exchange for the value of a piece of real estate. Hard money loans usually come with much higher interest rates than normal commercial or residential property loans, and these are rarely, if ever, issued by commercial banks or other lending institutions.

Hard money loans are similar to bridge loans in that they usually have similar requirements for lending and cost to the borrower. The main difference between the two is that bridge loans typically refer to commercial property or investment property that does not qualify for traditional financing by virtue of being in a state of transition.

Hard money loans on the other hand typically refer to asset-based loans with a high interest rates that are sought out because of a financial situation. The most common reasons for availing of a hard money loan are arrears on existing mortgages, or a situation wherein bankruptcy and foreclosure proceedings are impending.

Hard money mortgages are typically applied for by private investors in their immediate areas. The credit score of the borrower is usually not an important consideration, as the loan is based on the value of the property that is put up as collateral. The usual ratio of the maximum loan to value is calculated at 65-70%. This means that if the property is valued at $100,000, the lender would be able to borrow $65,000-70,000 against it. This relatively low loan to value ratio or LTV provides additional security for the lender, since they can foreclose on the property in the event of non-payment by the borrower.

In determining the LTV, the value of the property is defined as the current purchase price. This amount is what a lender could expect to earn from the sale of the property in the event of a loan default, necessitating a sale of the property in a one- to four-month period. This is in contrast to the market value appraisal, which assumes a sale in which neither buyer nor seller is in a hurry to sell.

Most hard money loans are funded with the lender in the first lien position. What this means is that in the event of a default by the borrower, the lender is the first creditor in line to collect payment. In some cases, a lender will give up this right to the first lien position loan to another lender. This situation is known as a mezzanine loan or second lien.

There are certain cases in which the low LVT is not enough to pay off the existing mortgage lender, allowing the hard money lender to assume the first lien position. Because the basis of a hard money loan is a security interest in the property, the lender usually requires a first lien position for payment of the loan. As a result, many hard money lender programs will allow for a Cross Lien on another of the borrowers properties. This cross collateralization of more than one property against a hard money loan is also called a blanket mortgage.

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