Hard Money Loans – The Basics

What is hard money used for?

A: Hard money is generally used as a bridge to allow the borrower or property to be brought into compliance with conventional financing guidelines or sold. It is generally a short to medium term solution (1-5 years) and it is used for all types of real estate: commercial, retail, office, industrial, raw land, construction, land development, multi-family, single family homes and manufactured homes.

Q: Why would anyone borrow hard money when banks charge lower interest and less fees?

A: There are many reasons why a borrower would choose to use private or hard money over less expensive institutional financing, but the following will address the most common uses. Speed of funding is the most common reason — banks typically take a minimum of 45 days to fund a residential loan, 60-90 days to fund a commercial loan, and 120 or more days to fund a construction or development loan. Private money, however, is typically funded within two weeks, and can be funded as quickly as 24 hours in certain cases. Another type of project suitable for private money is a property that either lacks cash flow to meet bank requirements or requires physical improvements. Banks will not typically fund a loan secured by a property that requires rehabilitation prior to its use, and thus the borrower will obtain a private money loan to purchase and rehab the property, and then payoff the private money loan with conventional financing. Sometimes a borrower will purchase a commercial property that has no tenants. Banks will not loan on such properties but private money will provide a bridge loan to purchase the property and provide the borrower with time to lease up the property. Once the leases are in place and have been “seasoned” for at least 12 months, a commercial lender will refinance the private money loan with institutional financing. Banks are also prohibited by law from making most types of raw land loans, so private money is practically the exclusive source of financing for raw land. Equity in the subject property or other properties owned by the borrower is another factor. For example, Coppercrest Funding http://www.coppercrestfunding.com loans based on the value of the property and not the purchase price, and is also able to cross-collateralize the loan with other properties, so we sometimes lend 100% of the purchase price.

Q: What are the interest rates?

A: Private money rates generally range from 12 to 14%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower.

Q: What fees are involved?

A: Hard Money Lenders charge a loan fee generally equal to 3 to 5% of the gross amount of the loan. There is also charge typical lender fees, such as a document preparation fee, a loan processing fee and an application/inspection fee. There are also third party fees involved, including escrow fees, title insurance fees and account servicing fees. CopperCrest Funding doesn’t not charge hidden junk fees, but some lenders do, so make sure you read the paperwork or have an attorney take a look at it for you.

Q: Can the fees be paid from the proceeds of the loan?

A: Yes, so long as there is enough equity in the project. Most often, all fees other than the application fee are paid from the loan proceeds.

Q: Is there a pre-payment penalty?

A: Generally hard money loans have a 3-6 month minimum interest requirement. For example, with a 6 month minimum interest clause, if the borrower repays the loan in 4 months, there is a penalty of two months interest. If the borrower repays the loan after six months, then there is no pre-payment penalty.

Q: How quickly can a private money loan close?

A: CopperCrest Funding have closed loans the same day when presented with a complete loan package, but we typically take one to two weeks. Since hard money is coming from private sources, and every deal is unique it is important to ask about closing timelines on a case by case basis, and each lender is different.

Q: Is an appraisal required?

A: Typically hard money loans require an appraisal, but if there is not enough time to obtain an appraisal and there are good comparable sales information then the lender can waive the appraisal requirement.

Q: Why do they call it “hard money”?

A: We have heard many explanations, but the most common answer is that the lending is based on “hard” assets as opposed to the borrower’s credit or income.

Hopefully this article answered some of your questions about hard money. If you are in a unique situation whether you have a great one of a kind investment opportunity or are facing a foreclosure because of an unexpected happening, hard money may be the solution for you. Remember, just like with any loan or mortgage, ask a lot of questions and read the paperwork.