What is Hard Money?
Private Money loans (also known as Hard Money Loans) are non-institutional loans funded by private real estate investors, companies and funds, and they are typically secured by a first or second Trust Deed against the subject property. Sometimes they are cross-collateralized against more than one property owned by the same borrower or buyer.
Why Hard Money?
The demand for Hard Money loans has increased in recent years as traditional sources of institutional money have tightened their underwriting guidelines. Stated-Income loans are scarce and difficult to qualify for. Borrowers that are self-employed may not be able to meet the stringent guidelines and real estate investors have fewer alternatives.
The current real estate climate presents many opportunities for real estate investors if they can get financing. Hard money lenders will often lend when banks will not.
How are Hard Money Loans Made?
Typically, these loans are short-term, meaning 6 months to 3-years. They can be tailor-made to fit the borrower's needs. Sometimes they are secured by more than one property. Lenders base their decisions on the property value, it's equity, its marketability, the borrower's exit strategy and his or her ability to repay the loan. They generally do NOT calculate debt ratios and usually do NOT take into account the borrower's credit and income. Funding can be very fast; sometimes within days of receipt of a new application.
What is the Cost of Private Equity Loans?
These types of loans carry a higher cost and interest rate for the borrower for the simple reason that they pose a higher risk for the lender. They are often a temporary solution that opens doors for a more permanent financial solution or exit strategy. Interest rates can range from about 6% to 14%. Paying points is expected and will vary according to the loan amount and the degree of risk to the Investor/Lender.
Hard money/equity based loans offer an alternative to stricter bank financing, thereby eliminating usual credit and income underwriting criteria and the delays of banks, mortgage companies or institutional lenders for traditional mortgage loans. Yes, the costs are more steep, but the market place provides a resource for those needing a short-term solution and can’t obtain traditional financing.
If the banks say no, you know where to go! In addition to traditional loan programs, RTC Mortgage arranges Private Equity loans so please don't hesitate to call. If you have clients with money to invest but don't trust the stock market or don't like the low returns of CD's and Money Market accounts offered by the banks, I may be able to help them receive a high rate of return by putting their money to work in Hard Money loans.