Private Lending for Real Estate – (hard money real estate loans)
A type of real estate asset-backed loan known as a hard money loan. A hard money loan involves taking funds secured by real estate. It is typically issued by private firms or investors. The interest rate on these loans is higher than that of conventional residential or commercial property loans.
Hard money loans are commonly used for short term real estate investments for less than a year. They are similar to bridge loans in that they have similar requirements and costs.
The main difference between the two types of loans is that a bridge loan is usually used for a commercial property that’s in transition and doesn’t qualify for conventional financing. On the other hand, a hard money loan is typically used for a short term highly leveraged real estate investment, or distressed financial situation. This includes cases where the existing mortgage is in arrears or foreclosure proceedings.
The amount of money that a hard money lender can lend is based on the ratio of the loan value to the property’s current value. This is known in terms of LTV. Most lenders will only lend a maximum of 65% of the property’s value. These loans are typically issued to investors, and the down payment required is usually higher.
In the US and Canada, the term “hard money” is often used to refer to loans that are mainly used for commercial and investment real estate. These types of loans were first introduced during the 1950s when the financial industry in the US was experiencing major changes.
Over the years, the industry has started to realize that the term hard money has no longer accurately represented the industry’s structure or direction. Instead, it should be used to refer to alternative forms of loans.
Hard money lenders have been around since money has been created. In recent years, hard money lenders have begun using term “private lending,” “bridge lending,” and “transitional lending” to describe themselves and their services.
Although the hard money loan industry has been officially unregulated since its inception, state governments can still restrict the interest rates that certain types of lenders can charge. For instance, in Arkansas and Tennessee, it is practically impossible for a financial institution to operate in these states.
The hard money loan market has significantly expanded following the 2009 mortgage crisis due to the passage of the Dodd- Frank Act. This act established strict regulations for the financial industry, which led to the development of new guidelines for the mortgage industry. One of these new guidelines required mortgage brokers, loan originators, and banks to evaluate the ability of borrowers to repay their loans.
Since the Dodd-Frank Act and other regulations have restricted the types of loans that can be made to borrowers, the hard money loan industry decided to only lend to businesses and commercial real estate owners.
Since the main basis of a hard money loan involves the liquidation value of a note’s collateral, hard money lenders require that the LTV be determined before they can extend the loan’s financing. An independent appraisal or a broker price opinion (BPO) is used by a hard money lender to determine the value of a property.
Unlike conventional loans, hard money loans have higher interest rates. For instance, they can range from 2 to 10% higher than standard loan rates. Despite this, these types of loans are commonly preferred by real estate investors due to their lower documentation requirements and fast approval times.