Hard Money Loan – how it works

hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine loan or second lien.

Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60 and 70% of the market value of the property. For the purpose of determining an LTV, the word “value” is defined as “today’s purchase price.” This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.

Below is an example of how a commercial real estate purchase might be structured by a hard money lender:

65% Hard money (Conforming loan)
20% Borrower equity (cash or additional collateralized real estate)
15% Seller carryback loan or other subordinated (mezzanine) loan

Hard Money Loans for your Business

Nothing is certain in our economy these days. Many people and businesses are still in quite good shape, but plenty of others haven’t been so lucky, and have had to close their businesses, and have filed bankruptcy or been foreclosed upon. And now, unfortunately, sub-prime mortgages aren’t available for assistance they way they used to be, due to the recent subprime mortgage crisis. It’s become much more difficult to know where to turn when it’s your financial future at stake.

If you’re one of the many, stuck between a financial rock and a hard place (or a foreclosure and a bankruptcy, as the case may be), it may be advantageous for you to look into taking out a hard money loan. Hard money loans are utilized by many people facing foreclosure or similar financial disaster, as the criteria for lending is more relaxed than a conventional loan. While your credit history is still taken into consideration by the lender, it’s typically not judged as harshly because the loan is given based on the value of real estate property you already own. Due to the slightly higher risk to the lender when dealing with hard money loans, they are not provided by banks but rather by private lenders, and as such, the interest rates of these loans aren’t based on bank rates. Typically the interest rate on a hard money loan will range from 15% – 25% (a little less for bridge loans, which are similar, but not necessarily used in times of financial hardship), which means that you probably don’t want to look to hard money loans as sources of long-term financing. The term is, in fact, often fairly short. Decide carefully if you’ll be able to afford the loan, as interest rates upon default may increase to the state limits, as high as 25% to 29%.