Hard money lenders have become popular as an alternative means of funding a loan when the bank turns you down. Hard money loans have their upside in that they provide you with a ready means of money. On the other hand, lenders can be notorious for hiking their rates as high as New York skyscrapers and beyond. Unscrupulous lenders can send you into a dive of unending debt and grab your property after you fall. So, one of the popular Google search terms on hard money lending is: "How can I find an honest commercial hard money lender?"
What is hard money lending?
The concept is simple and, actually, quite useful once you get the hang of it. Hard money lenders loan money to people who otherwise would not be able to these funds. Examples include if you're deeply in debt and need to rent or buy a home but can't get the money to move because your credit report is low. Or you want to start a business but can't land a loan because of your credit report or other reasons. This is where the Good Samaritans appears in the form of these lenders and they may fork you the required money.
Hard money lenders deal with different kinds of loans ranging from residential to commercial and almost anything in between. Their approval depends on the value of your collateral. Each money lender sets his own fees, drives his own schedule, and has his own requirements for determining your credibility. Each, too, carries certain loans that others won. Banks refrain from offering hard money loans; they're too risky. Hard money lenders will give you them. They're willing and mostly able to take the risk.
Other advantages of getting a hard money loan
You'll also find hard money loans wonderful in that the process is so much simpler than the traditional mortgage system. All you'll need to do is make an appointment; answer some questions; provide some credit to lenders who ask for it; and demonstrate the value of your property as collateral. The lender assesses the value of your property. If it looks sufficiently valuable, he or she may advance you the loan. Loans usually take less than ten days to come through. Typically, you'll receive the money in three or fewer days. If you know the money lender, he may give it to you that same day. This sounds wonderful if you need that money now!
The process is also far simpler than the complicated underwriting process that is done under normal conditions. When applying for the hard money loan, you have to sign and complete far fewer forms and some money lenders will overlook your FICO score.
Thirdly, banks cap your loans minimizing your money and limiting you on your property requests. Some hard lenders may cap your loans too, but you'll find many who will consider complex-collateral requirements and properties that involves tens of millions of dollars. The bottom line for the hard lender is the borrower's profile and the value of the property.
So what's the problem?
The interest is almost double that of the conventional loans. That's where the bad reputation comes from. And there are some bad apples. But actually hard lenders are forced to do this because that's the way we make our profit. We take risks in relying on the property as collateral and we spend our own money in advancing these loans.
Another disadvantage is the low value-to-property ratio where the loan will typically only be made at 70 to 80 percent of the property value so if the lender assesses your priority at $ 100,000, you will receive $ 70,000 – $ 80,000.
Hard money commercial loans are far riskier than hard money residential loans. If you default, you do not get to keep the 30 to 40 percent down you placed on the property. Instead, the lender will seize the entire asset and liquidate the asset to cover the remaining loan sum. Any additional amount goes into the lender's pocket and not back into yours. The commercial mortgage market has a much slower turnover than the residential market as a whole. It could be years before a commercial property sells, and lenders cover their losses with this protection.
Who should use commercial hard money lenders?
That said, some people would profit more than others from applying for a hard money loan. These include people who find themselves in one of the following situations:
- Expedited Financing for the Real Estate Investor – You want to quickly close and sell a property. Unlike traditional avenues, the closing is far quicker and approval is granted within the week. This because the hard money lender funds from her own pocket, so you don't need to submit all the documentation or wait the month or more until your application is approved.
- Small Business Owner – Banks and traditional lending institutions are more reluctant to take risks, therefore these institutions yank struggling startups through a gruelling processes to determine whether they are applicable. Most appealing startups are turned down. If you are a small business owner who finds himself in that situation, you may want to consider applying for a commercial hard money loan. Hopefully, your business succeeds because if it doesn't the investor will use your business property as means of repayment.
- Low credit score investor – If you are trying to invest or purchase a property but are turned down by traditional lending institutions because of a low credit score or history, you may want to consider a commercial hard money lender. The requirements to qualify for a hard money loan are less stringent than qualifying for a traditional loan, but the repayment is going to be far higher. The risk is going to balloon, too.
And coming full circle: How do I know who I can trust?
That's a good question. I usually advise people to do the following:
- Google and research lenders. Check their profiles and see if they are certified by the National Mortgage Licensing System (NMLS). They should also carry licensing from their state regulatory agencies.
- Speak to them. See if they and you match.
- Hire an attorney to review any and all forms before you sign
- Thoroughly review the lender's processes, terms, and schedule. Know that you can also negotiate the fees.
In short …
Some hard money lenders are unscrupulous. Some states and the Consumer Bureau have implemented some laws to protect you. Look into them, shop around, pitch your proposition, and negotiate your terms. The process can be risky but if you're able to repay the loan, you may find yourself with the property or item that you want.