Defining Hard Money Loan – Part 2

In my previous post on the subject, I mentioned that hard money loans are based on available equity. Or the amount of loan requested vs. the property value. In addition, I mentioned that estimating the value of a property was not easy but that using the 90 days rule, combined with income potential or actual would help. Clearly for commercial properties, income will be the way to go for valuation. While these criteria give us a good insight on hard / private money loans

A hard money real estate loan, for both commercial and residential properties, is a loan that does not meet the underwriting requirements of conventional lending institutions. Another way to look at it, hard money loans are customized to the specific conditions of each application. Customization could be related to the property, the borrower the terms of the loans, the market etc… An argument could be made that a hard money real estate loans are all loans that are not funded under conventional underwriting standard and are more expensive.

In addition, to equity and property valuation here are few more criteria defining what hard money loans are. Loan costs are significantly higher. Borrowers will pay anywhere from 3 pts to 6 pts in fees. One point is equal to 1 percent of the total loan amount. This reflects the costs of doing loans that are customized. Loan costs also reflect the perceive risk that a lender is taking. The higher the perceived risk from the lender’s perspective the higher the costs of the loan will be.

As part of the loan costs the interest rates charged per loan will be a component of defining a hard money loan. In general interest rates charged will be above 10%. You can find in some cases lender offering loans between 9% and 10%. These programs are really limited and very specific to certain transaction. Anything below 9% will be more of a customized conventional loan that requires a little underwriting flexibility.

To summarize a hard money loan is defined by its primary underwriting criteria, available equity. Its costs in terms of points and the interest rate charged.