Hard money loans refer to loans made against the value of a piece of real estate collateral by a private lender. Lenders typically structure the loan at 60-70% of the LTV (Loan to value). A hard money loan is usually for a shorter term than conventional bank loans, may carry a higher interest rate, and takes first lien position to other loans. Occasionally they take second position, also called a mezzanine loan.
Hard money loans are made on the basis of the value of the property, not the creditworthiness of the borrower. If the borrower defaults, the lender will foreclose on the property. The lender makes money on the loan, and if the borrower defaults there is sufficient value in the property to cover the lender’s costs and allow for a profit.
Hard money lenders are often private individuals loaning money from their pension plans and other assets. Interest rates are generally higher than traditional bank or subprime loans. Often the borrower is unable to obtain financing from a bank because there is too much risk, either in the property or in the creditworthiness of the borrower. Borrowers frequently find these private lenders through brokers and other intermediaries.
These loans are often short term, and may be structured with a balloon payment at the end. They are called “loans of last resort” as the borrower often needs to obtain financing to avoid foreclosure or pay a balloon payment on an existing loan.
These are common types of hard money loans:
Hard money loans can be helpful for commercial property investors who need to pay off an existing mortgage or balloon payment, or who have equity in the property and need to finance some upgrades or repairs.