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Hard money loan | ||
A hard money loan is a specific type of financing in which a borrower receives funds based on the value of a specific parcel of commercial real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. 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 not yet qualifying for traditional financing. Whereas hard money often refers to not only an asset-based loan with a high interest rate, but can signify a distressed financial situation such as arrears on the existing mortgage or bankruptcy and foreclosure proceedings are occurring. Loan StructureA hard money loan is a real estate collateralized loan based on the quick-sale value of the property against which the loan is made. Most lenders fund in the 1st-lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, lenders will subordinate to another 1st lien position loan; these loans are known as mezzanine loans or second lien position loans. 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 60-70% of the value of the property. For the purposes of determine an LTV, the word "value" is defined as "today's purchase price". This the amount that 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 1-4 months' time. This 'value' differs from an MAI appraised value. Below is an example of how a commercial real estate purchase might be structured by a hard money lender: 65% Hard Money Loan 20% Borrower equity (cash or additional collateralized real estate) 15% Seller carry back loan or other subordinated (mezzanine) loan HistoryHard Money is a term that is used almost exclusively in the The hard money industry suffered severe setbacks during the real estate crashes of the early 1980s and early 1990s due to lenders overestimating and funding properties at well over market value. Since that time, lower LTV rates have been the norm for hard money lenders seeking to protect themselves against the market's volatility. Cross Collateralizing a Hard Money LoanIn some cases the low loan to values do not facilitate a loan sufficient to pay the existing mortgage lender off in order for the hard money lender to be in first lien position. Because securing the property is the basis of making a hard money loan, the first lien position of the lender is usually always required. As an alternative to a potential shortage of equity beneath the minimum lender Loan To Value guidelines, many hard money lender programs will allow a "Cross Lien" on another of the borrowers properties. The cross collateralization of more than one property on a hard money loan transaction, is also referred to as a "blanket mortgage". Not all homeowners have additional property to cross collateralize. Cross collateralizing or blanket loans are more frequently used with investors on Commercial Hard Money Loan programs. Copyright 2008 - France BtoB from Wikipédia
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