Money is considered to be "soft" or "hard." Soft money usually refers to standard loans from a bank. Hard money is an option for loans that banks usually don't offer. A hard money loan is a short-term, asset-based loan, from which a borrower receives funds using real estate as collateral. Typically, this type of loan is issued with a higher interest rate than a conventional commercial or residential property loan. They are usually secured from an independent lending business or individual.
STRUCTURE
Hard money loans are utilized to obtain funds quickly, sometimes in a distressed financial situation such as a bankruptcy or foreclosure proceeding. Usually the borrower's credit score is not important, but the interest rate is higher than a bank loan. Usually, the loan is structured based upon the quick-sale value of the property. The quick-sale value is often defined as "today's purchase price" which is an estimation of what the lender could expect in the event that the loan defaults and the property must be sold within a four month timeframe. The loan is then created upon this quick-sale value. Typically, hard money loans are assessed at a rate of 60-70% of the quick-sale value of the property (the "loan-to-value," or LTV amount). This protects the lender in the event that the borrower defaults on the loan.
RATES
Traditionally, hard money loans have been mostly unregulated by state or federal laws. Some states, however, place restrictions on the interest rates. These rates are not dependent upon bank rates. Instead, they are more dependent on the real estate market and availability of hard money loans. They are more expensive than traditional loans and carry a risk to the borrower. That risk is usually the collateral of the real estate that was used to back the loan. Interest rates usually increase in the event of a late payment and prepayment and other penalties may apply.
POINTS
One point equals one percent of the loan amount. So, charging one point on a $100,000 loan would be $1000. Hard money lenders may charge anywhere from 2-10 points as an origination. The points are typically 1-3 more than on a traditional loan.
WHY?
Borrowers assume the risks and costs of a hard money loan to save equity, finance investments that would otherwise be achievable. Borrowers should use a professional real estate attorney to review loan documents so they can ensure the property is not lost as a result of late payment or other default without benefit of traditional procedures that would require a court judgment.
Gunderson, Denton & Peterson, P.C.,
1930 N. Arboleda, Suite 201,
Mesa, AZ 85213,
http://www.gundersondenton.com/
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