A hard money loan is a loan secured by the equity of a real estate property. They are usually arranged at higher interest rates than conventional commercial or residential property loans. In reality, every hard money loan is different. There are many other factors that affect individual hard money loans, including: equity, ownership occupancy status, property type, property age and condition, deferred maintenance, location, co-borrowers, market trends, availability of lenders and other factors. Most of the factors above can be mitigated with one word: equity.
The industry began in the late 1950s when the credit industry in the U.S. underwent drastic changes (see FDIC: Evaluating the Consumer Revolution). Hard money loans or private money loans are terms that are used almost exclusively in the United States and Canada where hard money loans or private money loans are most common. In commercial real estate, hard money or private money was developed as an alternative for property owners seeking capital against the value of their holdings. The speed and flexibility of the hard money or private money lender to provide the loan was the answer. The industry eventually spread to the residential markets.
Mixed use hard money loans are a type of borrowing instrument utilized by those wishing to invest in commercial and residential properties for money-making purposes. An example of a mixed use property is an apartment building with stores on the bottom floor or a church with a school. These loans are usually provided via private lenders like Saxe Mortgage, rather than via banks and mortgage companies. The interest and pay back terms may be a bit higher and shorter than traditional lenders as far as level of interest rate and number of years required to pay off the balance.
For example, banks may provide money for mixed use purposes for 6-8%, while private hard money mixed use lenders may ask for 9-14% interest. These types of mixed use loans are not meant to be long term loans, although terms as long as 5 years out can be obtained. Rather these types of mixed use hard money loans are also at times called bridge loans, and are for investors needing cash right away for the short term.
One example of mixed use hard money loans is for investors buying apartment buildings which will be rehabbed and then put right back onto the market and sold for a profit. The borrower is only interested in obtaining the cash to purchase and flip the property, hopefully selling it off before the terms of the mixed use loan becomes due. Some investors will want to buy vacant land or commercial property that will be used for a variety of reasons: retail, storage, health, etc. These types of investments are considered to be non-conforming and are more suitable for mixed use private or mixed use hard money lenders.
Mixed use hard money loan lenders are interested in getting their cash back with the interest, and therefore, if something can be worked out with borrowers who have experienced bankruptcies, foreclosures, difficulty in coming up with down payments, self-employed situations, etc., then they will go ahead with the deal. As long as the lender thinks they can get their investment back out of the property plus interest, then there is a good chance for obtaining the mixed use hard money loan. The process is extremely easy, and in most cases, the borrower can get the funds in less than 7 days.
For investors interested in new construction, mixed use hard money loans can be the solution. The funds are usually put into an escrow account to be used as needed in the form of draws as the construction is completed stage by stage. A mixed use bridge loan may not work here, because if the property being built is a large apartment complex, most likely it will take two to three years to complete all the phases, and most bridge loans are for no longer than two years. Therefore, a lending instrument will need to be obtained that will be sure to cover all the months of build-out needed for the project.
There are mixed use hard money loans provided by lenders like Saxe Mortgage who specialize in lending to investors wishing to borrow large amounts of money, even into the millions of dollars for commercial uses such as building assisted living centers, medical centers, storage facilities and entertainment parks. These lenders are interested in the loan-to-value ratio, searching for equity in property generally not above 70%. That is, the borrowed amount will not be greater than 70% of the worth of the property. In all cases, the lender is interested in understanding how the borrower plans to pay back the loan. The client needs to have all of that figured out at the time the loan is taken out. The lender does not want to take back the property.
Mixed use hard money loan lenders may request that an appraisal of the property be conducted as part of the process of approving a loan of this type, because they are making lending decisions based on the value of the property in question. This is why they can by-pass all the traditional lender paperwork requests required in putting together traditional mortgages. This is also why the loan can be put together in a relatively short period of time, which is ideal for people who need cash quickly to close on an investment.
Commercial Lending Hard Money
Commercial lending hard money is what Saxe Mortgage specializes in! It is similar to traditional hard money, but may sometimes be more expensive, as the risk is higher on investment property or non-owner occupied properties. Commercial lending hard money loans may not be subject to the same consumer loan safeguards as a residential mortgage may be in the state the mortgage is issued. Commercial lending hard money loans are often short term and therefore interchangeably referred to as bridge loans or bridge financing.
Commercial Lending Hard Money Lender or Bridge Lender Programs
The definition of "hard money commercial lending" when referred to in real estate financing is essentially a non-bankable loan. The name hard money commercial lending is frequently interchanged with "no-doc" or private loans. For a hard money commercial lending loan, the underwriting decisions are based on the borrower's hard assets (real estate). Hard money commercial lending loans typically close relatively quickly. Saxe Mortgage is the leader in the Bay Area - San Francisco for hard money commercial lending (NO-DOC / Private lending).
Commercial lending hard money lender and bridge lender programs are similar to traditional hard money in terms of loan-to-value requirements and interest rates. A commercial lending hard money or bridge lender will usually be a strong financial institution that has large deposit reserves and the ability to make a discretionary decision on a non-conforming loan. These borrowers are usually not conforming to the standard Fannie Mae, Freddie Mac or other residential conforming credit guidelines. Since it is a commercial lending property, they usually do not conform to a standard commercial lending loan guideline either. The property and/or borrowers may be in financial distress, or a commercial lending property may simply not be complete during construction, have its building permits in place, or simply be in good or marketable conditions for any number of reasons.
Some private investment groups or bridge capital groups will require joint venture or sale-lease back requirements to the riskiest transactions that have a high likelihood of default. Private investment groups may temporarily offer bridge or hard money, allowing the property owner to buy back the property within only a certain time period. If the property is not bought back by purchase or sold within the time period, the commercial lending hard money lender may keep the property at the agreed price.
Hard Money Commercial Lending Verses Traditional Lending
Traditional loans from banking institutions rely heavily on borrower’s income, credit, tax returns, etc., as opposed to a hard money commercial lending loan's primary reliance on the hard real estate asset. Along with requiring substantially more documentation, conventional lenders have minimum credit scores (typically low 700 Fico and above) as opposed to hard money commercial lending loans that are underwriting on the collateral as opposed to the borrowers’ credit. Along with different underwriting standards, loans on conventional commercial lending loans can take months to close; hard money commercial lending loans close much quicker. The final important differentiator between hard money commercial lending financing and conventional financing is the interest rate. Since there is more risk in a true collateral based loan, the interest rates are higher than a conventional mortgage.
How to Know if a Commercial Lending Loan is Right For Me
There are numerous circumstances in which a hard money commercial lending loan is the best option for a client.