Hard money loan

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans, starting at 7.7%,[1] because of the higher risk and shorter duration of the loan. Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.[2]

The loan amount the hard money lender is able to lend is determined by the ratio of loan amount divided by the value of property. This is known as the loan to value (LTV). Many hard money lenders will lend up to 65 – 75% of the current value of the property.[3]

Hard Money is a term that is used almost exclusively in the United States and Canada where these types of loans are most common. In commercial real estate, hard money developed as an alternative "last resort" for property owners seeking capital against the value of their holdings. The industry began in the late 1950s when the credit industry in the U.S. underwent drastic changes.[4]

From inception, the hard money field has always been formally unregulated by state or federal laws, although some restrictions on interest rates (usury laws) by state governments restrict the rates of hard money such that operations in several states, including Tennessee and Arkansas are virtually untenable for lending firms.[5]

The hard money loan mortgage market has greatly expanded since the 2009 mortgage crisis with the passing of the Dodd Frank Act. The reason for this expansion is primarily due to the strict regulation put on banks and lenders in the mortgage qualification process. The Dodd Frank and Truth in Lending Act set forth Federal guidelines requiring mortgage originators, lenders, and mortgage brokers to evaluate the borrower's ability to repay the loan on primary residences or face huge fines for noncompliance. Therefore hard money lenders only lend on business purpose or commercial loans in order to avoid the risk of the loan falling within Dodd Frank, TILA, and HOEPA guidelines.

Because the primary basis for making a hard money loan is the liquidation value of the collateral backing the note, hard money lenders will always want to determine the LTV (loan to value) prior to making any extension of financing. A hard money lender determines the value of the property through a BPO (broker price opinion) or a independent appraisal done by a licensed appraiser in the state in which the property is located.

See also

References

  1. ↑ "Hard Money Loans: A Complete Guide". californiahardmoneydirect.net. Retrieved 21 April 2017.
  2. ↑ BHUTTA, NEIL; SKIBA, PAIGE MARTA; TOBACMAN, JEREMY (March 2015). "Payday Loan Choices and Consequences". Journal of Money, Credit and Banking. 47 (2-3): 223–260. doi:10.1111/jmcb.12175.
  3. ↑ "Hard Money 101: Everything You Need To Know About Getting Started With Hard Money Loans". RETipster. Retrieved 31 July 2017.
  4. ↑ "Evaluating the Consumer Lending Revolution". fdic.gov. FDIC Office of Inspector General. 17 September 2003. Retrieved 12 October 2015.
  5. ↑ "Usury Law". dfi.wa.gov. Retrieved 12 October 2015.
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