What is Hard Money Loan?

A hard money loan has many different names; asset-based loan, private money loan, bridge loan, and a no document loan. This type of loan is when a private individual or company will loan money based upon the secured equity in a non-owner occupied investment property.

Loan to value is the amount loan requested in relationship to the value which gives us a ratio. Generally, the max Loan to Value (LTV) is around 65-70% in most situations.

Borrowers or entities seek hard money lenders because they do not qualify for a conventional bank loan because of income or credit is most scenarios. Because they generally cannot qualify at the bank level they are subject to high than conventional interest rates ranging from 7% to 16% depending on the security level.

Hard money loans can be in any seniority and junior position as a 1st trust deed, 2nd trust deed, and 3rd trust deed. The less security for the investor the higher the interest rate and points.

Investors of hard money loans come in many forms. Private individuals comprise of a majority of peer to peer private loans to entities or borrowers. Next largest would be investment groups that compile funds in exchange for a set return on investment secured by real estate. Wall Street has come into the hard money market as a Non Qualified Mortgage investor with a set return to investors giving them a uniform borrower type with similar risk grouped together. Life Insurance and Pension companies come invest in private hard money loans on a specific type of investment that matches their appetite. Lastly, hedge funds invest in high risk hard money loans where the rates are high and may be a more aggressive lend to own type of investor. Most investors would prefer for the borrower to perform on their loan as agreed upon.

How does it work?

  1. Identify the property that you would like to purchase or refinance.
  2. Determine property value and loan amount requested.
  3. Pick a private hard money lender that services the state where you property is located.
  4. Start the application process. (1003 Loan Application, Tri-Merge Credit Report, Sign Required Disclosures)
  5. Order the Appraisal or Broker Price Opinion (BPO) through your private hard money lender. Generally they require one of their approved appraisers. Appraisals range from 400-650 dollars. BPO range from 150-300 dollars.
  6. Your hard money company will present your file to the investors that like your type of deal. Investors will then review the your file for 48 hours or so and return with a Letter of Intent to proceed with terms and fees.
  7. If you agree to the terms and fees then commit to the loan and the investor with the private loan company will arrange for any remainder documentation required and the closing process.
  8. Sign loan documents at escrow.
  9. Investor funds the loan.
  10. Receive your funds via escrow.

Who do I use?

Picking a company to represent you is the most important part in closing your private hard money loan on time and the terms that you requested.

Unfortunately, the industry is not regulated as hard as the conventional owner occupied lenders so the customer service and commitments to your loan are generally very weak. From 30 years of experience there are many pitfalls as to why your loan doesn’t close escrow with one company but will close with another.

Statement of fact is that there are more hard money loan borrowers than investors willing to lend. Obviously the good loans get funded right away by good investors but anything on the fringe becomes a negotiating situation.

There are very few true private hard money lenders who lend on the basis of equity or LTV. Most hard money lenders disguise themselves as a real asset-lender but are really Wall Street, or some type of institutional funds that require that your loan fits within their box which means increased required documentation of income, assets or credit.

Watch out for some deceitful lender tactics that can destroy your deal and put you in a possible litigious situation. Firstly, institutional lenders are very conservative with value and will require their own appraisal companies and in most situation will not appraise the property at its real value. In combination of promising a higher ltv the lesser value.

DO NOT SHOP YOUR LOAN TO EVERYONE!!! This is the death of closing your file ever. The world of investors is very small and generally we all know each other and look at the same deals. In the event that you think that it’s better to shop it to several companies then your loan will be presented to possibly the same investors and when that happens investors get hesitant because it makes you look desperate.

What rates can I expect and terms?

Private / hard money rates are all over the board depending on your situation. It is impossible to give you an exact quote prior to receiving and Letter of Intent from an realialble proven investor.

Average 65 LTV single family homes rates range from 7% to 12% depending on credit score, income and assets.

Origination points range from 3 to 10 points depending on the rate provided, length of term and prepayment penalties.

Where do I find one?

Finding a good hard money company is the most difficult thing to do. Very few companies that advertise for you loan can really perform on closing your loan themselves. Most will broker your loan to other companies and there starts the daisy chain of miscommunication.

Stay away from any company that uses crowd-funding as their investor platform. They are not good at originating new loans but are good at buying existing trust deeds on a note market exchange. A few examples of these companies are www.PatchofLand.com, www.Peerstreet.com, and www.LendingHome.com.

Land loans are very tough to do unless they are in a thriving city and infill situation. The max loan to value is 50% and terms are less than a few years. If you are planning on developing the land some construction loans require the land to be paid free and clear so don’t fall into the trap of trying to finance the land if you are going to have to pay it off before the next loan can be put in place. Companies like Kennedy Financial or FMC say they can fund but will never fund. They exist on charging up-front fees or not having the ability to fund at all.

Should I invest in hard money loans as an investor?

Investing in private hard money loans is an excellent alternative to the traditional stock and bond opportunities. The risk is lower with greater yields when you have the knowledge of what makes a good and bad investment.

The safer the investment the lower the interest rate yield.

For Example: A private hard money loan in San Francisco or Los Angeles, at 50% loan to value or better with decent credit is approximately 7-8% interest only to the borrower. The probability that the investor will default on the loan and lose the property in foreclosure with 50% equity is very unlikely. It is less that 3% chance that a foreclosure will occur.