Defining Hard Money Loans

More and more I am getting questions about hard loans from borrowers and/or brokers who have never contemplated getting one or originating one for their clients. Some of the questions are related to underwriting and some to costs. Other questions are about ltv, property types, terms etc… Here I want to start addressing these questions and continue to provide insight on hard money or private lending. One point that I would recommend to keep in mind all private lenders have slightly different ways to underwrite and approve loans. This is good for borrowers as they can be turned down by one lender and approved by another one.

Let’s looks at some of the criteria that make a loan a hard money one. The primary criteria that all private / hard money lenders will agree on is that these loans are based on available equity in the property or loan to value (LTV). However, conventional real estate lenders both for residential and commercial properties have for primary criteria credit. In regard to the LTV, If the loan amount requested is too high in relation to the value of the property then the loan will be turned down. Hard money lenders today do not fund loans above a 70% LTV. In general depending on the area of the country and within states, it will be no more than 60% to 65% of the property value.

Going back to credit and Fico score. If a borrower has good credit it does not mean that his/her hard money loan will be approved. Good credit is only one of the criteria of the approval process. Also, this will not improve the rate that the borrower will get it just makes it more interesting. Today, as we have discussed in previous post, most hard money borrowers have good credit.

In today’s real estate market the property value is really crucial no matter if you try to finance a property through conventional means or through private-hard money sources. Again this both affect commercial and residential borrowers. Commercial valuations are in a way more accurate than residential ones as they are normally based on income. As with everything else there are always exceptions to the income valuation. Residential real estate is valued mostly based on its "perceived” exchange value. This is for most people the main sticking point nobody can really agree on what that means. I would recommend as a basis to think in term of 90 days. The value of a property can be based on its exchange price, if it had to be sold within 90 days. If the real estate industry was to ask appraisers to provide valuations based on this criterion, we all would have a much better idea of a property value.

More and more we are seeing values for residential properties based on the income they would generate if rented out. This is becoming a very important factor when approving financing for residential investment properties.