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Hard Money Loans Criteria Have Changed

Hard Money Loans have long been the standard financing for real estate investors and businesspersons to acquire quick short term project funding. Even though this type of financing is expensive in terms of interest rates when compared to conventional financing, the terms and speed of the transaction made it viable for quick turnaround situations such as “flipping” properties or purchasing raw materials.

There have been two important changes to the accessibility of hard money loans since the economic crash of 2008. One change is the tightening of credit restrictions by all kinds of lenders, on the borrower. In the past some real estate investors who were seeking hard money would often have had a recent bankruptcy or had received a Notice of Default and were still able to acquire the necessary financing. If this is your situation now, the prospect of acquiring the financing is considerably less.

The other change is a reduction in loan-to-value (LTV). Many lenders were comfortable with LTV in the 70 -75% range and going to 80% on especially lucrative deals. Most lenders have gone back to a more conservative 60 – 65% LTV.

The Dilemma Faced By Hard Money Lenders

Hard money lenders face the same challenges that convention lenders are facing as the commercial and residential markets adjust to a different economy over the next few years. One of these challenges is property appraisal. As properties values adjust, how can the lender be sure that the property will be worth 5 years from now what it is today?

What Does This Mean For You, The Loan Seeker?

You must be aware of the changes in the market and the increased caution with which lenders will proceed in the foreseeable future. You must present a well thought out and well written loan proposal along with a financial statement and monetary commitment that shows you are a serious businessperson. Forget about asking for 100% financing unless the lender is a very close and beloved relative!

Hard Money Loan

A hard money loan is a very singular type of mortgage in which the loan is secured by a valuable asset such as real estate. This type of loan is most often used for the purchase of business real estate, but in some cases it can be used for private funding. The money itself usually comes from private sources, most often from the area in which the property in question is located.

A hard money loan can be collateralized against the property that the borrower is purchasing. If the structure of the loan is set up this way, the cash value of the loan is usually for about 70% of the quick sale value of the property itself. Because the loan is secured against real property, a borrower usually opts for a hard money loan as a last resort in times of financial distress. Sometimes it is the only form of financing possible, since credit score isn’t a huge factor in qualifying for the loan.

Private capital investors rarely take a look at a person’s credit rating, more often paying attention to the money making capabilities of the venture they are financing. Due to the structure of the loan as it relates to the value of the collateral, it is rarely the whole source of financing for any given project. Interest rates for hard loans are usually a bit higher than a standard mortgage. While the interest rate may be somewhat regulated by government agencies so it doesn’t get too high, hard money loans are not very tightly regulated. The rules of the industry are so different from the standard financing field that normal rules don’t apply. In an almost comical turn of events, the nearly complete deregulation of the industry has allowed hard loans to be incredibly speedy and efficient, now that government has been taken out of the equation.

A hard money loan, therefore is often a good source of quick capital for ailing businessmen. Unfortunately, predatory lending tactics aren’t uncommon, driving up the price of the loan. If you see yourself in the market for a this type of loan, make sure you use a professional real estate attorney, or you could become a victim yourself.

The Difference Between Hard Money Loans and Private Money Loans

To survive in today’s tough economy, business owners and real estate investors often turn to non-traditional lenders to secure financing for operating expenses or property purchases. Non-traditional lenders have emerged as an excellent option for many because they offer loans with fewer restrictions and more generous lending terms than traditional lending institutions such as bank and mortgage brokers. However, many investors and business owners find themselves confused by the difference between hard money and private money lenders.

What’s the Difference Between Hard Money and Private Money?

Both kinds of money loans provide timely financing for investors and business owners with a wide variety of financing needs. However, there are important differences between these two types of loans. Understanding how these types of loans differ is key to picking the financial product that will best meet your needs.

Basics of Hard Money Lending

Hard money loans are offered by businesses that specialize in alternative lending. While the funding for these kinds of loans often comes from private sources, the lenders are regulated and specialize in working with real estate investors, private borrowers and business owners. Like private money lenders, hard money lenders focus on borrower equity instead of credit scores to make lending decisions.
However, hard money lenders generally have set approval criteria and loan terms. They work with borrowers who can’t find financing elsewhere, but they don’t negotiate extensively about how loans will be repaid. Instead, they rely upon industry-standard formulas to determine interest rates and repayment plans that allow profit while also providing fair terms for borrowers.

Basics of Private Money Lending

As their name suggests, private money loans are offered by completely private lenders. They generally do not operate as businesses and often do not advertise that they have funds available to be lent. Most private money lenders are also unregulated and don’t have to conform to lending industry regulations regarding loan rates or terms.

Approval criteria for loans can also vary widely between private money lenders. Because there are no set, standardized criteria, borrowers often have little idea whether or not they’ll be able to access private money funds. Securing these types of loans tends to require heavy negotiation regarding interest rates and repayment plans.

Should You Choose Hard Money or Private Money Loans?

Choosing between the two may be difficult, but many borrowers find that hard money loans are much more beneficial because they are offered by regulated businesses. Borrowers can review the criteria of individual lenders before turning in their applications so that they have a decent idea of whether or not they’ll be approved for financing. These loans also offer fair, industry-standard terms that benefit borrowers.
Remember that there are different types of hard money loans available:

  • Gap loans help business owners meet deficiencies between their available funds and business expenses.
  • Fix-and-flip loans help borrowers who want to buy distressed properties to rehab them and sell them at a profit.
  • Commercial rehab loans help those who want to buy and repair distressed commercial properties.