South Florida Real Estate News

What is a “Hard Money Loan?”

Actually the name is very misleading because HML loans can be easier than to obtain than conventional financing. The industry defines “Hard Money” as “unconventional asset-based lending” with real estate as the collateral. It is unconventional because the HML loan does not meet traditional underwriting lender requirements.

DEFINITIONS
Blanket Loan: A blanket loan, or blanket mortgage is a type of loan used to fund the purchase or refinance of more than one piece of real property rather than securing a new mortgage for each property. The borrower uses the blanket loan to buy them or refinance them all under one mortgage. Once a parcel is sold, a portion of the mortgage is released, with the rest of the mortgage remaining intact.
Bridge Loan: A Bridge Loan is a short-term loan typically taken out for a period of
2 weeks to 3 years pending the arrangement of longer-term financing. It is a method of financing used to maintain liquidity while waiting for an anticipated expected inflow of cash such as the sale of an asset. It is also used by investment bankers as a method of financing companies before their IPO (Initial Public Offering) or Stock Market Launch to obtain necessary cash for operations and expenses associated with the IPO.
Hard Money Loan (HML): A Hard Money Loan (HML) is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of real estate. HML are typically issued by private investors. Interest rates and fees are typically higher than conventional residential or commercial loans because of the higher risks taken by the HML Lender.
Mezzanine Financing: Mezzanine Financing is a hybrid of debt and equity financing used to finance the expansion of existing companies. It is debt capital that gives the HML Lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks.

WHAT ARE TYPICAL TERMS FOR HARD MONEY LOAN?

Appraisals: Most HML Lenders will order their own appraisal and may consider reviewing an existing appraisal. If the LTV is very low, such as 30% LTV, the HML may only require only an in-site inspection and may waive the appraisal requirement. Typically residential appraisals are completed within a few days while a commercial appraisal may take up 3 to 4 weeks.
Fees HML: HML Lenders may charge an application fee or a loan commitment fee that may or may not be credited at closing. HML also charge between 2% to 9% points as an origination fee to be paid at closing.
Terms HML: Terms for HML varies greatly with each lender. Typically local Florida HML Lenders will lend up to a maximum of 60% LTV of the lesser of the purchase price or appraisal value of the residential single family home or condo while raw land may be at a maximum of 50% LTV. Interest rates vary from 10% to 13% depending on the type of asset and risk to the HML. Commercial real estate typically is 60% LTV. Most HML are “interest only” with a 24 to 36 month balloon. Some HML may have a prepayment penalty of 6 to12 months guaranteed interest.
Title: Most HML Lenders will only accept Residential HML as a second home or investment with title in a corporate entity such as a corporation or LLC. Due to current Federal Laws financing restrictions of residential primary, owner-occupied properties has caused HML loans to be undesirable.

Until next time...JJ.