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Hard money lenders are lending companies offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called a bridge loan) that provide funding based on the value of real estate that has been collateralized for the loan. Hard money lenders typically have much higher interest rates than banks because they fund deals that do not conform to bank standards.
Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size for a hard money loan.
Money loans are more expensive than traditional loans because they are not based upon traditional credit guidelines which protect investors and banks from high default rates. As hard money lenders may not require the income verification that typical lenders require, they experience higher default rates (and, thus, charge a higher rate of interest). Individuals and companies may opt to take a hard money loan when they cannot obtain typical mortgage financing because they do not have acceptable credit or other documentation typically required by a conforming loan.
Hard money collateral is typically the real estate loaned on. This can include residential, multi-family, commercial, or raw land properties. However, it sometimes include other assets of the individual or business borrowing the hard money. In many cases a hard money lender will offer a smaller loan size based upon a lower "Loan To Value Ratio". This means they may opt to loan no more than 65% of the property value. Therefore it is common for real estate investors to offer additional real estate as collateral in order to obtain a larger loan amount. This is known as cross-collateralization.
Several states' usury laws, including Tennessee and New Jersey, prevent hard money lenders from operating with their usual practices. Regulation of hard money not only differs by state, it differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumers generally have additional protections in individual states. They also have more lending oversight and regulation benefits federally when the loan is issued by a commercial bank, that is federally chartered by the FDIC. Some of the most aggressive loan terms are issued by commercial hard money lenders. In addition, the type of property being lent upon may also be a factor in determining if state usury laws allow for legal hard money lending.
Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a commercial property or residential investment property. It can also be secured against a residence in conjunction with a business property as a means of obtaining additional collateral for the lender. That type of additional security is referred to as a blanket mortgage. The sources of asset based commercial hard money loans are generally the following:
These commercial hard money lenders all have varying degrees of benefits as well as downfalls in terms of choosing a commercial hard money loan lender. For example, a private individual may offer special terms, however may be unwilling to offer a work out plan as a matter of procedure, in the event the loan becomes delinquent. A federally-chartered bank may offer a competitive loan rate in comparison to an individual, however may demand a high pre-payment penalty fee, costing the borrower more money if they decide to sell or refinance the loan within one to five years.