With a hard-money loan, a private individual acts as the lender and extends a loan to the high-risk borrower. The hard-money lender can be a person, a trust, a real estate investment group, or any other private entity. Because the private lender is taking on this risk, this lender charges higher interest rates than traditional mortgages obtained through financial institutions. The interest rates on hard-money loans can be twice as high or higher than loans available through traditional mortgage lenders. This is simply because these borrowers are considered much higher-risk candidates. But buying a hard-money home loan can be a great option for someone whose other financing options are non-existent.
Q & A
Q: What is hard money used for?
A: Hard money is generally used as a bridge to allow the borrower or property to be brought into compliance with conventional financing guidelines or sold. It is generally a short to medium term solution (3 mo to 12 mo) and it is used for all types of real estate: commercial, retail, office, industrial, raw land, construction, land development, multi-family, and single family homes. (All property types listed under "Rates")
Q: Why would anyone borrow hard money when banks charge lower interest and less fees?
A: There are many reasons why a borrower would choose to use private or hard money over less expensive institutional financing, but the following will address the most common uses. Speed of funding is the most common reason -- banks typically take a minimum of 45 days to fund a residential loan, 60-90 days to fund a commercial loan, and 120 or more days to fund a construction or development loan. Private money, however, is typically funded within two weeks, and can be funded in as quickly as 24 hours in certain cases. Another type of project suitable for private money is a property that either lacks cash flow to meet bank requirements or requires physical improvements. Banks will not typically fund a loan secured by a property that requires rehabilitation prior to its use, and thus the borrower will obtain a private money loan to purchase and rehab the property, and then payoff the private money loan with conventional financing. Sometimes a borrower will purchase a commercial property that has no tenants. Banks will not loan on such properties but private money will provide a bridge loan to purchase the property and provide the borrower with time to lease out the property. Once the leases are in place and have been "seasoned" for at least 12 months, a commercial lender will refinance the private money loan with institutional financing. Banks are also prohibited by law from making most types of raw land loans, so private money is practically the exclusive source of financing for raw land. Equity in the subject property or other properties owned by the borrower is another factor. For example, we loan based on the value of the property and not the purchase price, and we are also able to cross-collateralize the loan with other properties, so we sometimes lend 100% of the purchase price.
Q: What are the interest rates?
A: Private money rates generally range from 12 to 14%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower.
Q: What fees are involved?
A: PMS charges a loan fee generally of 4% to 8% of the gross loan amount (depending on the situation). There is also a lender underwriting fee, a document preparation fee and a loan processing fee. There are also third party fees involved such as escrow, title insurance and appraisal.
Q: Can the fees be paid from the proceeds of the loan?
A: Yes, so long as there is enough equity in the project. Most often, all fees other than the application fee are paid from the loan proceeds.
Q: Is there a pre-payment penalty?
A: Generally hard money loans have a 3-6 month minimum interest requirement. MOST OF THE LOANS WE FUND DO NOT HAVE A PREPAYMENT PENALTY.
Q: How quickly can a private money loan close?
A: PMS has closed loans the same day when presented with a complete loan package, but we typically take 5 TO 10 days to fund a loan, including appraisal time.
Q: Is an appraisal required?
A: Typically hard money loans require an appraisal, but if there is not enough time to obtain an appraisal and there are good sales comparisons then the lender can waive the appraisal requirement.
Q: Why do they call it "hard money"?
A: We have heard many explanations, but the most common answer is that the lending is based on "hard" assets as opposed to the borrower's credit or income.
Hopefully this Q & A answered many of your questions about hard money. If you are in a unique situation, whether you have a great one-of-a-kind investment opportunity or are facing a foreclosure because of an unexpected happening, hard money may be the solution for you. Remember, just like with any loan or mortgage, ask a lot of questions and read the paperwork.