What is a hard money lender?
Hard money lenders are private companies or individuals that specialize in offering
short-term loans. These types of loans are secured by the quick sale values of properties
that are owned by the borrower.
Interest rates greatly vary on these higher risk loans, which see increased interest
rates, often substantially greater than traditional banks. These higher rates account
for several possibilities, which may include the following:
1. The borrower’s financial situation is not optimal and therefore, his/her loan
is likely to be rejected by traditional banking institutions; and/or
2. The hard money lender is acting as a direct lender, which puts them in a position
that involves greater risk when advancing funds to borrowers.
The average interest rates on hard money loans are between 10 to 18-percent.
However, borrowers that have histories of defaulting may be subject to higher rate
fees. Since they are not subject to standard government guidelines, some lenders
may require borrowers to make monthly interest payments, while others will allow
balloon interest payments.
Payments and interest rates depend on the loan’s term, borrower’s profile risk,
current real estate market and the value of the property. If a borrower is inquiring
about a real estate loan in an area that has a higher-than-average number of foreclosures,
then the hard money lender will likely charge a higher interest rate to negate a
more challenging, difficult property sale.
These higher rates and more complicated loan terms are justifiable because borrowers
cannot apply for conventional bank loans. Banks focus on supplying loans to people
that have strong credit ratings, excellent payment histories and are not investing
in risky ventures. Hard money lenders charge more fees and interest because many
government laws have forced banks into creating punitive terms that have made it
impossible for many real estate investors to consider a commercial construction
loan, commercial property loan or even an apartment building loan.
Most hard money loans are structured in three different ways:
1. Loan-To-Value Percentage – Lenders estimate the property’s value and provide
a loan advance based on if the property sells within one to six months from the
funding date. This “selling” value is known as the “quick-sale” value. Lenders generally
advance up to 70% against this value, which differs from a market appraisal value
and does not analyze distress sale values.
2. Borrower – Borrower’s risk profiles are assessed before loans are approved.
3. Loan Size – The minimum loan size is assessed.