What is a “Hard Money” Loan?

Hard Money Loan

As a hard money lender in Chicago funding projects nationwide I talk to many people who do not understand what a hard money loan is. They often do no understand the purpose of a hard money loan including when is the best time to use and when not to utilize this specialized type of Funding. In addition to knowing what a hard money loan is we need to know what it is not. This will help clarify purpose and profitability.

A hard money loan is a certain type of financing in which funds are received by the borrower based on the value of a specific parcel of real estate. In all lending there are three main things the underwriters evaluate to determine eligibility. Those three things are Character (Credit), Cash Flow (Income) and Collateral (Property). The Hard money loan puts more weight on the Collateral and less weight on the Character and Cash Flow.  Because of this Hard Money Loans are typically issued with a higher interest rate, higher than conventional commercial or residential property loans. They are almost never issued by a commercial bank or other deposit institutions because they do no meet the federal mandate of sound underwriting when there is little or no requirements that the borrower show the ability to repay the loan. Hard Money loans are more expensive because they are not based on traditional credit guidelines which protect those very same banks that do not offer Hard Money. Hard Money loans are property driven and generally close much quicker than the traditional conventional funding.

What Hard Money Lending is Not

Though the emphasis on Hard Money Lending is on the value of the property it is not the sole criteria lenders use. There was a time when that was the case. During that time Hard Money Loans were made exclusively by local private investors would makeup their own guidelines and determine how much they wanted to profit and did not require a down payment. Many of these private money lenders went out of business when the housing market crashed and property values declined. They lost money along with real estate investors. Therefore, today Hard Money loans are primarily made by institutional investors who do care about other factors, primarily experience and skin in the game. In the past bad credit, no money and no experience were no deterrent to getting a hard money loan. Not so today.

Hard Money Loans For Investors

One other very important factor is that Hard Money Loans are for Investors only. They are not for owner occupant borrowers. They are business purpose loans. Because the rates and fees are higher than the legal limits for owner occupant loans, if a lender gave hard money loan terms to a borrower it would be illegal. Not only are the rates and fees are not legal, but also it is not legal to not verify a borrowers ability to repay the loan.

Another reason Hard Money Loans are for Investors is because most require skin in the game. They require investment from the borrower. Imagine someone came to you with a business venture and they said you put up all the money, you take all the risk and I will reap the greatest reward. What would you say? Hard Money Lenders are saying no today. The few 100% programs are very expensive and or are so prohibitive that it does not make financial sense or very few people qualify.

So as an Investor you must have skin in the game (down payment), experience, and reserves to qualify for a hard money loan.

Whether Commercial properties or residential investment properties FBC Funding can facilitate  financing hard money loans for investors who have credible projects in Chicago and Nationwide.