I hope everyone is off to a great year. I am commonly asked what is a Hard Money Loan, Bridge Loan, Private loan, etc… Many times these terms are used interchangeably. One could ask the question “what is hard money” to twenty people and likely get twenty different answers. I put together this article to answer many of the basic questions regarding hard money loans /bridge loans / private loans. I hope this article helps both borrowers and brokers understand what hard money really is, when it is used, and items to watch out for when obtaining a hard money loan.
What is Hard Money?
So let’s start with what a Hard Money Loan really is. In its simplest form, a hard money loan is any loan that is secured by a hard asset. In our case our loans are secured by first mortgages on residential or commercial properties. To explain further, banks/traditional lenders when doing loans base their underwriting both on the borrower (financials, credit score, etc…) as opposed to a hard money lender that bases their lending decision strictly on the value of the property.
I’ve assembled a number of resources to help borrowers/brokers answer some key questions regarding hard money lending (bridge lending, private lending, etc..). Below are some commonly asked questions:
Why would someone need a hard money loan?
The reasons for a borrower needing a hard money loan run the gamut. The most common reason is that the borrower needs funds quickly (for an acquisition or refinance) and they don’t have the time or patience to wait on a conventional lender (on a commercial transaction most loans take 90 days+ and the paperwork required is astronomical). The second most common reason is that the borrower doesn’t fit into the traditional “vanilla box” of a conventional lender. For example I recently closed a transaction for a small business owner that owned their property free and clear, they needed some working capital and had great credit. Unfortunately the borrower did not have two solid years of tax returns (they heavily invested everything in the business the last two years and expensed a number of items). As a result, the borrower was unable to get a bank loan. We were able to do a bridge loan in order to give them the working capital they needed. The borrower will be able to refinance into a more traditional loan within the next 18 months.
Why would a lender make a loan to someone with less than stellar credit or financials?
This is a good question. I actually wrote an article titled Credit or Collateral, which is more important for a lender. I’m a big believer that a snapshot of a person’s financial and/or their credit score doesn’t tell the whole story. There are all sorts of items that could impact a borrowers financials or credit score. A good example. I recently closed a loan on an office condo. The borrower had 40% to put down, and a 660 credit score. Unfortunately the bank would not lend to the borrower since he completed a short sale less than 3 years ago. I asked the borrower about the issue and he explained that he was 100k underwater on a property and the value would take 10 years or so to rebound, so it was a business decision to take the short sale to save him the constant cash outflow. The borrower did not have a single late in the last three years. We were able to do a loan for the borrower to give him time for the short sale to fall of his credit report (the picture above is of the property we closed a loan on for the borrower)
How does a hard money loan work?
For Fairview, the process is very simple. We are able to do first mortgages on residential investment properties (in CO and GA) and commercial properties (CO, GA, and IL). All we need to get started is our one page loan application. We will review the property comparables (along with the income approach for commercial properties) and let you know what our loan amount will be along with the terms of the loan. We don’t require an appraisal or any upfront fees to evaluate a loan. If the loan works for the borrower we setup a time to physically look at the property. We get additional information from the borrower needed for closing. The loan is put into closing. As soon as title is done we close. We close and fund the same day. There are no loan committees with Fairview, we do all underwriting, due diligence, etc.. in house to ensure a quick closing. The whole process takes 5-10 days (sometimes sooner depending on the borrower’s needs)
By Glen Weinberg
COO/Partner Fairview Commercial Lending
Other Questions regarding Hard Money Loans/Private Loans
Are private lenders loan sharks?
I’ve heard about upfront/due diligence fees, what are these and should I pay them?
Resources for Hard Money borrowers/brokers
1. Loan Shark: Get the facts on Private Lending: https://www.fairviewlending.com/blog/news/loan-shark-get-the-facts-on-private-lending/
2. 5 tips to protect Borrowers/Brokers when obtaining a hard money loan https://www.fairviewlending.com/resources_private_lending_tips.htmv
3. Use caution when selecting a non-conventional lender (as published in the Colorado Real Estate Journal) https://www.fairviewlending.com/news/CO-real_estate_jornal.pdf
4. What are upfront fees and why is it important for borrowers/brokers to avoid certain lenders: https://www.fairviewlending.com/blog/no-upfront-fees-why-is-this-important/