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Hard Money Financing - Key Things To Know

Hard money lenders in the recent past were a secondary option for any commercial financing. Companies looking to start or extend their present businesses, buy some new properties or develop new commercial projects had a lot of options for financing. Banks were still lending and conditions of lending were reasonable. With the current economic situation it is absolutely a new game.

In the today’s situation, all banks have limited their lending and tightened their underwriting standards greatly. Even professional businesses and developers are finding that traditional financing for many types of business projects is no longer available. Traditional hotel financing for new constructions does virtually not exist. Hard money financing now has become the primary and often only option for funding commercial deals.

Hard money financing -as well known as bridge financing - is riskier than traditional financing, so as the result the interest rates and points are higher as well. For instant the commercial hard money and typically charge are provided between 11-15 per cent with the number of points charged ranging from 4 to 8. Traditional financing rates are from 6 to 8 per cent with 1-3 points charged. Residential hard money will incur even higher charges. The terms are traditionally between 12 and 36 months, amortized over 25 years, almost always interest only and often with the interest payments escrowed.

Hard money lender will review the developers and owners experience in a specific industry, their financial conditions, their current strategy and other crucial aspects of the project. However, the primary underwriting factor for funding hard money loans is the property market value. Depending on the business project a hard money lender will value an asset based on the as-is value, the as-completed value, the total cost of the project and what the property will sell within about 90 days.

The total amount of financing issued on the hard money loan will be a percentage of the loan to value (LTV) or loan to cost (LTC) based on the valuation methods mentioned above. As a rule, 65 per cent is the maximum LTV that is financed. But, it is possible to finance 70-75 per cent of the value depending on the project. To increase the LTV, it is possible to provide other properties in the form of collateral.

What is the reason for business owners and developers for using hard money financing? Today there are more reasons for it than in any other time. First of all, they need money fast, for some specific purposes or for a short period of time. Today traditional financing for the majority of types of projects has dried up and traditional underwriting standards have become stricter.

Today more than ever before hard money financing is relevant and often critical in economic growth by providing the needed money to find worthy projects.

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