Hard money loans are granted on the basis of the collateral asset rather than the credit of the borrower himself. Generally, hard money loans come from private individuals or companies that seek investment in the real estate market. Because the loan represents a higher degree of risk than conventional residential or commercial mortgage, the interest rates are higher. Most hard money financing has a term ranging from several months to two or three years. The financing works similarly to that of a bridge loan, although bridge loans generally refer to investment property in transition or commercial property that is not yet ready to qualify for conventional financing. Hard money generally refers to a distressed situation such as foreclosure or bankruptcy that is already in place or arrears on the current mortgage.
Qualifying Factors for Hard Money Residential Loans
The criteria to help a borrower qualify for a hard money loan vary significantly, depending on the purpose of the loan and the particular lender. In some cases, lenders use the same metrics as banks (credit scores, verifiable income and a down payment), but in most cases, hard money lenders look at the value of the property that serves as the collateral. In most cases, the largest loan that a borrower could expect would range between 65 and 75 percent of the property’s value, although in some cases the loan can go as high as 85 percent. So if a property is worth $500,000, the borrower would only be able to get a hard money loan for up to $375,000 except in cases where the private lender will accept a 15 percent down payment. Keeping the loan-to-value (LTV) ratio low gives the lender additional security in case the borrower defaults on the loan and the lender ends up having to foreclose on the note.
In most cases, a hard money loan is made in the first position. This means that in the case of default, or if the property is sold, this loan is the first item funded by the proceeds. Sometimes a lender agrees to subordinate his loan to another loan that is in the first position. This sort of loan is called a junior lien, second lien or mezzanine loan. The structuring of the deal is based on a percentage of what appraisers determine as the quick-sale worth of the property in question. This is the source of the LTV ratio; it is important to remember that the “V” in LTV stands for the value the property would bring at the present time. In a situation where real estate prices are fluctuating wildly, the changes in the value can end up altering the available credit for a property significantly. Because a default sale takes place under duress, it is likely that the price would be lower than it would in a typical sale, and it is this lower value that lenders consider when determining the appropriate LTV numbers.
The United States and Canada are the two countries in which the term “hard money” is used to refer to this sort of loan. Within the field of commercial real estate, hard money emerged as a sort of “last resort” for owners wanting capital to set against the worth of their property. This industry appeared in the late 1950s, but it went through hard times when real estate crashes in the 1980s and 1990s resulted from lenders funding loans well over the proper LTV ratio. As a result, lower LTV rates became common for hard money lenders who wanted protection against volatile price changes in the market. The reason for high interest rates in today’s market are a way to pay lenders back for the additional degree of risk that they accept with this type of loan.
Amansad Financial has long held relationships with hard money lenders serving clients in Western Canada. We also have connections with hard money lenders looking to work with borrowers in Florida and California. If you live in one of these areas and would like to take a look at a hard money loan to finance your next real estate purchase, get in touch with one of our hard money specialists. After analyzing your current situation, our specialist will make a recommendation based on your needs and the best outcome for you and your family. Give us a call today!