Minnesota Hard Money

Hard Money – What is It?

More than likely you have heard about hard money. However, you may not really be sure what exactly a hard money loan is all about. Well, essentially this is a type of asset based lending in which a person that is borrowing the money gets the funds, but they are secured by the value of a piece of real estate. Usually these loans come with pretty high interest rates, and usually commercial banks are not the ones that are making these loans. You’ll find that hard money is a lot like going with a bridge loan, with similar criteria. However, usually a bridge loan is for investment or commercial properties. Hard money is a bit different because it is a loan that not only is asset based and it includes a very high interested rate, but there many be a financial situation that is quite distressed as well.

Who Finances Hard Money Mortgages?

You may be wondering who the hard money lenders are. Who would want to finance these hard money mortgages? Well, usually you’ll find that these options are provided by private investors, since banks usually will not offer these options. Most of the time, the credit score of the person borrowing doesn’t even matter, since the loan is taken out against the collateral property and its’ value. When the loan is made, usually it is only given for about 65% of the value of the collateral. So, if the property is worth about $200,000, the loan amount would be about $130,000. This way if the borrower does not pay, the hard money lenders will be able to still make money and they will have the extra money to make up for the foreclosure proceedings they will have to go through on the property.

Structures of These Loans

Understanding the structure of this type of a loan can definitely be important. Usually this type of loan is a type of real estate loan that is made against the value for quick sale of the property. Usually the hard money lenders will fun these loans and will be in the first lien position, so that they are the first to end up getting remuneration of the borrower ends up defaulting. If they allow someone else to have the first lien position, this is called a mezzanine loan. The loan to value ratios on these loans is usually somewhere between 60% and 70%. If a lender was structuring the purchase of a piece of real estate, they would probably go for 65% in the hard money loan, 20% of cash or equity from the borrower, and then 15% of a seller carryback loan or another type of loan, such as a mezzanine loan.

History of the Term

You’ll find that the term “hard money” is really only used in the United States as well as Canada. This is where these loans are very common. When it comes to commercial real estate, these types of loans became a last resort option for those who needed capital and they are able to get it against their holdings and the value of them. This type of lending started out in the 1950s; however, in the real estate crash in the 80′s and the crash in the 90s, this industry had some real setbacks. Lower loan to value ratios are now in place since these things have occurred.

Commercial Asset Based Lending

Commercial hard money, which is often known as commercial asset based lending, is much like traditional hard money as well. However, since there is a higher risk, they are usually on the more expensive side. Usually these loans are short term and sometimes are also referred to as bridge financing as well. You will find that the industry moves quite quickly, making it great for people who need to have funding fast. However, the prices of the loans have become more expensive because of this fact.

The Expense of These Loans

The expense of the hard money loans can definitely be steep. They are definitely a whole lot more expensive than sub prime mortgages. Usually there is more risk to them, and the interest rates can be high. Banks don’t determine the interest rates that are paid. They are decided on the availability of the hard money and the current real estate market. Usually they end up ranging between about 12% and 21%. However, in some cases it can go all the way to 25% or even a bit higher. In some cases you could end up paying a penalty fee if you pre pay as well.

Finding a Quality Hard Money Lender

Finding a quality hard money lender to give hard money loans or no-doc/stated loans can be difficult. It’s important that you are careful as you select a lender as well. This market is quite predatory, and the prices go high and sometimes there are lenders that charge very high fees in the beginning as well. It’s usually not a great idea to go with a lender that asks you to offer them high fees up front. Unfair practices that occur should be reported to the attorney general office where you live. These loans can be helpful, but only if you get the right lender, so it’s important that you choose very carefully.

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