What is Hard Money Lending or Private Money/Private Loans?
Hard money loans produce fast results. If a hard money lender will not do the deal then you should re-analyze your deal to make sure that it makes economic sense.
A loan of "last resort" or a short-term bridge loan. Hard money loans are backed by the value of the property, not by the credit worthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, hard money loans have lower loan-to-value (LTV) ratios than traditional loans.
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 collateral is typically the real estate loaned on. However, it sometimes includes 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.
Businesses and individuals often have financial needs that cannot
be met from a traditional bank or lending source. In these cases,
hard money loans—or money that is made available through private
sources—may be the appropriate answer to their needs.
Hard 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.
For example, borrowers who need money quickly may opt for a hard money loan because they can generally get their loan with a week. The approval process from a traditional source, on the other hand, can last six weeks or longer. Traditional sources will require
documentation, credit reports and appraisals – we do not. Hard
money loans may also be a good option for individuals or
businesses interested in either renovating or improving a piece of
property or in purchasing a commercial property that does not yet
have tenants or cash-flow. Money is often not available through
traditional sources for these types of projects.
Hard money loans are typically based on the value of the real estate
that is used as collateral to secure the loan. Further, because of the
risk involved with making a hard money loan, borrowers can expect
the interest rate to be higher than what one would typically see in a
traditional loan (i.e. our minimum interest rate is 16% per annum). However, hard money loans can offer resources and flexibility to borrowers who have immediate financial needs.