Hard Money

With the new lending environment, the financial world is changing pretty quickly. If you are searching for a loan these days, chances are you will notice that lending is much much tighter than it was just a year or two ago. Hard money has become an avenue for even well qualified individuals to explore.

I am a professional in this industry, and have put this lens together to help educate people on what hard money is and what the general qualifications are to secure financing of this nature.

The basics of hard money

With the recent ecconomic downturn, obtaining financing for any reason has become a challenge, even for the most well qualified individuals. Banks are tightening their lending standards, many wholesale lenders have gone completely out of business, and the programs left are not terribly creative.

In these days of tightened lending, hard money lenders fill a niche role by providing loans in scenarios that are outside of the institutional guidelines. In the recent past, hard money lenders were the lenders you would turn to for bankruptcy buyouts, foreclosure bailouts, or if your credit score was somewhere south of 500. Those days are gone, and the hard money lenders left standing are lending on very conservative guidelines, and are requiring decent credit (or at least an explanation for major dings).

The main underwriting standard for hard money lenders is, and has always been, the equity in the property. The loan to value is the make or break factor. But in today's market, obtaining funding, even from a hard money lender, requires more than just equity in your property. Many packages going to hard money lenders are becoming more and more documented. Having a package put together properly is of paramount importance. Additionally, working with a hard money broker, someone who specializes in hard money and has the resources to find the money you need, becomes a key issue.

In the recent past there was easy money to be made in the mortgage world. Subprime lending was the rage, all a broker needed was a license and a matrix. If you fit in the box, you had a loan. Since the demise of the subprime days, however, many brokers have been left looking for a job in a different industry. Those who are still in the mortgage industry have started to diversify. With no subprime lenders left, many of these brokers have started looking for hard money business. The problem is that in the hard money world, there are very few reps, no matrixes, and the lenders don't advertise much. To become a hard money specialist takes years of work building relationships, learning the industry and cultivating your resources.

If you are in need of a hard money loan, do yourself a favor and make sure the individual representing you has the experience to get the job done. This is truly a case where experience does matter, and you don't want to make the wrong choice only to find out 60 days down the line when your hard money funding has still not occured.

We have a number of resources on this page to help you make that decision. In addition, if you have hard money questions, feel free to submit them below and we will get you a professional answer quickly.

There are also many types of hard money loans available. When people think of hard money, often times they think of a simple transaction for the purchase of a house, but with alternative lending such as hard money there are many more options available.

Fix and flip or hard money rehab loans are one such type of loan. They are much different than a standard mortgage might be. To begin with, the loan to value on these transactions is not based on the purchase price or current value of a property, but rather on the 'as complete' or 'after repair' value. Often times this value is referred to as the ARV. When a loan can be made based on a future value it allows for more aggressive funding than if that same loan were based on the current value or purchase price.

Another component to these types of loans is the fund control account. Money is held for the work that needs to be done on the property and is released in draws for the work to be done. There are many different types of fund control accounts. Some require a rigid draw structure with on site inspections as the work progresses. At the other end of the spectrum are those that will advance money for work to be done and then release more when pictures or videos are taken showing the progression of work.

In addition to the fund control account, these rehab loans also have an interest reserve account. The interest reserve account makes payments on the loan so that the borrower does not need to make payments on the loan out of pocket for the duration of the interest reserve account. Between the interest reserve account and the fund control account, the goal of these hard money rehab loans is to have the full project cost tied up within the loan, ensuring that there will not be a shortfall that will cause the property to be uncompleted.

Another hard money loan type includes construction loans. These loans are structured very similar to the way a rehab loan is structured (as described above). The difference with a ground up construction loan is typically the amount of cash a borrower needs to have into a deal. Ground up construction deals, as a general rule of thumb, are going to take more cash from the borrower than a rehab or construction completion loan.

Revolving lines of credit are another type of hard money product that are becoming more popular. These can be structured in a number of ways, but the general guidelines remain very similar across the different products. Typically speaking these lines of credit are secured by property owned by the borrower. Each property has a release clause on it, so when one property is sold that amount is paid back on the line and the property is released to be sold. Many of these release clauses are tied to the sales price of the property, with typical releases ranging anywhere from 60% to 90% of the sales price of the home. These revolver accounts can also be used in conjunction with a construction loan, often times when financing a subdivision. This allows the developer to borrow to build, then as the homes sell they can pay down the loan, freeing up more funds that the developer can then use to build more homes.

Commercial hard money loans also have different features than institutional commercial loans do. With institutional lending, commercial properties must debt service. In fact, commercial properties must do more than debt service, with typical debt coverage ratios ranging from 1.15 to 1.25. What this means is that for every dollar in expenses the property must generat $1.15 - $1.25 in income. This can be difficult for investors who are purchasing distressed commercial properties that have a lot of vacancies or tenants paying under market rents. WIth a commercial hard money product, however, the debt coverage ratio is not the main factor. Rather, the main factor is the value of the property, with the final loan amount being a percentage of that value regardless of the debt coverage ratio.

Each transaction in the private money world is unique, and the underwriting is not black and white but rather a sliding scale. Often times it is best to speak with a professional about a specific scenario to ensure you are looking at your financing options accurately. We specialize in these types of transactions and you can learn more about our products or contact us by visiting our California hard money lenders site.

Have hard money questions? Feel free to post them here for a professional answer.