Financial Articles

Hard money loans are loans collateralized by equity in real estate. Generally used for business purposes, hard money loans are often used as bridge financing for real estate investments, business real estate asset purchases and refinancing.

Hard money loans have three distinct advantages over bank loans:

1. Hard money loans can be closed (funded) quickly.
2. Lending decisions are made based more on the value of the real estate than on the financial status of the borrower.
3. Hard money lenders have more lending criteria and will fund projects that traditional banks and lenders will not.

In exchange for taking greater risks and funding so quickly, expect to pay substantially more than you would for a traditional mortgage. Hard money rates range from 11% to over 22 – 25%. Points generally run between 4 and 15; the greater the risk in the project and/or the borrower, the higher the price.

Providing clear information about the property you wish to collateralize for a hard money loan will help you get answers fast. When making a hard money request, include the following:

• If your hard money request is for a purchase, include:
  • The purchase price of the property
  • Purchase agreement between you and the seller
  • A recent written appraisal within the past 6 months. Don’t guess at the value – you can’t get hard money funding based on your guess
  • Hard money will get you about 65% of the purchase price. Explain where the rest of the money will come from. You will be need to come up with about 20% of the amount yourself and the balance (15%) can come from another source.

• If your hard money request is for a refinance, include:
  • The price you paid for the property initially and the date you bought it
  • A recent written appraisal – within the past 6 months

• For either kind of hard money request, include:
  • A personal or corporate financial statement with your assets and liabilities listed
  • If the property is incoming producing: last year and YTD financials showing gross income, expenses, and net. The hard money lender will want to see that you can afford the loan you are asking for, pay your other bills, and still have a few dollars left at the end of the month.

Creative Hard Money Financing
Sometimes it does not seem possible to come up with 20% of the purchase price of a property which you wish to collateralize with a hard money loan. There are creative ways to make hard money a possibility. If you have an additional piece of real estate with equity in it, you may be able to make a purchase without coming up with 20% cash. Here’s how:

This concept is best explained by example.

• Purchase price of a property you wish to buy (A) $2,000,000.00
• Additional piece of property (Property B) $2,200,000.00
• TOTAL Collateralized Properties $4,700,000.00
• 65% loan on $2,500,000.00 $3,055,000.00
• Amount you owe on Property B - $800,000.00*
• Balance left pay for property A $2,255,000.00
• You will need to pay off the old mortgage on property B to get the new loan. Now you have a single hard money loan that covers both properties. Your collateral in Property B satisfies the requirement for 20% of you own equity at risk in the project.

As with any loan, make sure a hard money loan makes sense for you. The rates are higher, but the advantages may make it the loan for you.