A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than a traditional mortgage loan. 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 does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.
Many hard money mortgages are made by private investors, generally in their local areas. In the past documenting credit history and income were not as important, as the loan is secured by the quick sale value of the collateral property. Today most hard money lenders require a traditional credit review.
Quick sale value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress and assumes amount 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 one- to four-month timeframe.
1) Common reasons for seeking a hard/private money loan:
a. Homeowner or subject property does not qualify for traditional agency type loan (FHA, VA, Fannie, Freddie)
b. Investor purchasing a home in need of a temporary bridge loan
c. Homeowner wants to stop foreclosure
d. Pull equity out
e. Unusual type of property
f. Borrower needs to establish creditworthiness
2) Typical terms:
a. 50% to 70% max loan to value
b. Higher interest rates: 12 to 18%
c. Balloon payments
d. First mortgage lien position
e. Higher fees: 4to 8 points
f. Full documentation
g. Detailed appraisal
3) Differences between hard money and private money
a. Hard money lenders are licensed and organized to lend money and private money lenders could be a friend, a family, a business associate.
b. Hard money lenders have set lending criteria with defined loan terms, rates and points all of which are known up front. Private money is more flexible on all the typical criteria and open to negotiation.
c. Private money lending is often less expensive than hard money loans. Hard money lenders get their money from private sources so they mark up the rate and fees to make a profit. When an LO works directly with private sources of capital, you can often negotiate better terms.
4) Hard or Private money borrowers need to plan an exit strategy prior to obtaining the loan.
Traditional lenders and investors may require a minimum of 6 to 12 months seasoning on title to refinance to the new appraised value. When your clients are using hard money to acquire investment properties you will need prepare them to be in that hard or private money for 12 months.
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Due to each state’s different usury laws, many hard/private money lenders are refusing to loan on residential, owner occupied homes and instead prefer to only make business-related loans or investor loans. Fees on hard/private money loans can be quite lucrative at 5 to 8 points.
Q: In the mid-1980s when many loan officers worked at a bank and the mortgage broker community was quite small, mortgage brokers were THE source for hard and private mortgage money. When a person could not get a loan at a bank, consumer finance company, or credit union, they found a broker and the broker was the person who knew where to find mortgage money for that particular person whose situation fell outside of traditional guidelines. Do you believe mortgage brokers will once again become this source or is it still fairly easy to compete against bank loan officers for traditional vanilla mortgage products?
With the changes in lending regulations for mortgage brokers, we have had to expand our sources for non-traditional money. However, I believe the broker can still compete with the banks for the vanilla mortgage products. Although banks do not have disclose yield spreads to the consumer, their rates tend to be higher than those the broker can get. Third party fees are comparable. The banks usually charge 1% origination and as a broker I too charge 1%. The difference is, I believe, the consumer gets a more one on one experience with the broker than the bank employee.
I do not see why a qualified experienced Broker could not compete with Banks in the standard vanilla type loan products,after all the Broker and with great individual experience in making things work has smany avenues to check out.
I think a Broker should be able to find financial solutions for special situations outside traditional guide lines where a Bank might be curtailed or not be as flexible or as creative as a savey Broker.
I see no reason why a broker would not be able to compete with the banks on a vanilla type of loan. I do think that brokers have more avenues to search on for the type of loan that fits the borrowers needs as well as the broker is not tied to the banks requirements and therefore may have more flexibility to get the loan funded where as a bank employee may be tied to the banks requirements and restrictions.
If you were working for a bank with sufficient, price competitive products to offer your client, why would you consider brokering your vanilla loan? Other than the “special needs” situation, I feel there is no need to broker. Now that Government transactions have returned(FHA/VA/USDA)and you have other competive programs as well, I fail to see a logical reason to broker the loan.
It may well be that the game has changed in light of the real estate debacle that has just beset the country. Banks are really going to put clamps on traditional lending guidelines and will almost certainly be precluded from any form of hard money lending unless the exit strategy is cast in stone. These circumstances should provide avenues for brokers to capitalize on demand for traditional lending and offer opportunities for creative thinking about hard money loans.
Brokers will need to stay educated on all possible avenues that could help their clients. This will be one way that a good broker will be able to stand out and provide solutions to people in communities that can not get help in traditional banks.
Hard/money lending
I feel blessed to know quite a few people who still lend on a case by case basis for not only residential lending but other types as well. It is nice to have that edge on my competition. I am going to be and am still more competitive than any bank, hands down. even in conventional lending
Sure Brokers could compete with Banks for those vanilla type loans. In fact most Brokers have access to hard money lenders where most banks won’t deal with it. I think banks will edge away from non traditional loans. Thats where a Broker will be a big service in providing lenders of hard money and other types of loans.
Self directed IRAs can be a great source of Private money. Everyone has a rich uncle. 🙂
I think brokers will need to find their own personal market, some will want to complete against banks for vanilla leans, and I think others will find a niche to market themself. I think brokers will once again become great value to the client that falls outside of the banks tradiional lending practices.
I think Brokers competitive angle needs to be service based. Banks might not have to disclose the YSP in their GFE’s (changing soon) but at the same time Banks are not known for efficiency and can add sometimes weeks if not months to a transaction. With Hard Money your usually doing more than just providing a loan, you’re usually giving someone a needed break to develop a plan to either sell their property and preserve any equity and their credit. Or you’re helping them buy some time to address property issues and prepare for a sale. Hard Money transactions are just that HARD. I’ve worked on 4 of them in my life and I do think that banks and brokers should view them as competition given the segment of the market they operate in.
Brokers will need to provide a value added service. Our industry will need to stay on top of what is available and provide better service than the banks. As we all know not every client falls into a nice, neat, easy loan package.
Over the years I have been associated banks and freguently opted to stay on the broker side of the fence. I really think it boils down to what a individual feels confotable being involved with, bank or mortgage broker.
Aside for the non disclosure of YSP I have always been more comfortable on the broker side of things. The broker situations I worked in have always had licenses in at least twenty or more states.
I must say that thinking back I have always felt that I had a advantage being a broker.
As a broker I always thought Hard Money loans where a part of our niche market. Sort of like a customer service tool.
I like to have many options available for my clients even if it means sending them to a hard money lender. I see myself as a resource and I do everything I can to compete with the conventional solutions. And, if a hard money option is all that is available to meet their needs, I have researched the best companies to help my client find the best terms and cost available. I have built referral business by staying open to whatever best fits the client and referring them on if necessary.
I also have many options for my clients and I can compete easily for the bank loans too! I feel I am a better option because it seems most of the bank lO’s are not very competant (I dont mean to paint all of them in this category just what I have been told by clients).
More of a question than a “response” – Does anyone know about obtaining lending through REI Solutions LLC aka Real Estate Investment Solutions LLC out of North Carolina, “able to do business throughout the U.S.?” The “marketing professional” says that I need to pay an upfront $795 fee to become a “member” to then be able to talk to a “Business Development Manager” about a non-owner occupied loan (NOO). I am a 10 year real estate investor with about 47 units and my regular commercial lender (major bank) has placed a hiatus on NOO loans and I’m looking for refinancing on a duplex in PA. These forum looks to be frequented by educated participants so I hope that someone has some information for me — either on REI Solutions or a potential lending source.
Hi Melinda,
The website looks pretty childish and there is NO information on the site about how their company is licensed. I’d guess this is a one man shop. Chances of this person being licensed in all 50 states is zero. Instead, he probably brokers to lenders in various states.
I highly recommend working with someone local, in YOUR city/state. There are plenty of licensed mortgage brokers who have access to many different hard money lenders. A broker will typically work on your behalf to find the mortgage money for you.
Best of luck! Stop back by if you have any more questions.
Jillayne:
Thank you for your response. I was skeptical and had only worked directly with my “banker” before (a VP, Business Banker at a major bank) so I was doing some research before moving any further. I appreciate your input and I am impressed with your site and the information contained therein. I will visit again. Have a great weekend.
Hard money loans they have there place an need positive and negative. If you need quick financing and obtain the property for a flip this helps the economics and employment sector. You have t factor in the higher interest rate and fees, but the return should be on you final objective. Some traditional Banks and others can’t help so Hard Money may be the answer.Also by borrowiing under this format, you must have an Exit strategy to be successful definately.
I my opinion the more equity you can bring to the table this allows you to have more flexable alternatives to pay back the loan and move forward.
It’s good there are many options of loans, but the hardmoney loan just not practical for most of people.
With the 2010 GFE it is more difficult for the broker to compete because of disclosing the ysp. A bank isn’t required to disclose the srp since it isn’t guaranteed or realized at the closing. It it probably more important now for broker to increase the avenues of business so I wouldn’t be suprised to more doing hard money loans.
If the mortgage brokers run out of product or are unable to compete with pricing then yes they will have to resort to adpating to the sale of hard money relationships or providers. It certainly is becoming increasingly difficult for broker shops to make the money they once did. Some consumers have a need for funds and are willing to pay the premium. If all are licensed and practice as professionals and there is transparancy.. then it shouldn’t matter what product they provide.