A Hard Money Loan is a specific type of financing in which a borrower receives funds based on the value of a commercial real estate property. Hard money loans are typically issued at much higher interest rates than standard commercial or residential property loans and are almost never issued by a standard commercial bank.
Loan Structure
A 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 determining an LTV, the word "value" is defined as 'today's purchase price'. This is 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. 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 Loan20% Borrower equity (cash or additional collateralized real estate)15% Seller carry back loan or other subordinated (mezzanine) loan
History
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 US underwent drastic changes.
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.
Legal & Regulatory Issues
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.
You will need the following information to submit a request for a hard money loan:
Property Profile
Appraisal dated within six months of request
Preliminary Title Report dated within 30 days of request
