Hard money loans seem to confuse people. Between a lack of accurate information and the many myths surrounding the hard money industry, it is easy for people to assume that hard money loans represent some sort of shady deal to be avoided.
If more people knew the truth about hard money lending and bridge loans (the two often go hand in hand) there would probably be less hand wringing over what is arguably one of the oldest forms of private lending.
Below are four key aspects of hard money lending compliments of Salt Lake City’s Actium Partners. Actium Partners is a hard money lender active in Utah and a few other states. They say understanding the key aspects of hard money clears up most misconceptions people have.
1. Collateral Makes the Difference
Hard money and bridge loans are often referred to as asset-based lending. Why? Because customers are expected to offer high-value collateral to cover what they borrow. Collateral makes the difference between loan approval and loan rejection.
Actium Partners explains that hard money lenders do not dig into customer credit histories and income statements. They look at collateral value. If the value is there, the loan will likely be approved.
2. Primarily for Real Estate Transactions
Although hard money lenders are private lenders free to do with their money as they please, the vast majority of hard money loans are offered for real estate transactions. The same goes for bridge loans.
A typical hard money borrower is a real estate investor looking for a loan to obtain a new piece of property. The loan is paid off with more traditional financing or through income generated by the property itself.
3. Higher Rates and Shorter Terms
As private lenders, hard money lenders still need to protect themselves financially. They need to manage risk through a variety of strategies, including rates and terms.
As a general rule, interest rates on hard money loans are higher compared to traditional loans. How high? That depends on the lender. There is too much variation to provide a hard and fast number here.
Similarly, the terms on hard money and bridge loans tend to be much shorter. A typical hard money loan has a term of two years or less. Borrowers are usually looking at 6 to 18 months, on average. By contrast, terms on traditional loans can range anywhere from 7 to 30 years.
4. Lower LTV Ratios
The fact that hard money loans are asset based requires lenders to be a lot more particular about loan-to-value (LTV) ratios. If you are not familiar with the LTV concept, an LTV ratio is simply a calculation of how much a lender is willing to offer based on the value of the asset in question.
Let’s say you have a borrower with an asset worth $100,000 looking to work with a lender whose maximum LTV is 50%. The most that borrower could borrow is $50,000. Assuming the asset is a piece of property the borrower wants to acquire, he would have to come up with the remaining $50,000 some other way.
Hard money lenders tend to have lower LTV ratios than traditional lenders. It goes back to the fact that they lend based on asset value rather than a borrower’s full faith and credit.
These four key aspects of hard money lending do a very good job of describing what it actually is. Needless to say that hard money and bridge loans are not shady back-alley deals made by private lenders looking to rip off their clients. It is time that we collectively put those myths to rest.
