Even though hard money and private capital lenders have become more common in the post-recession lending market, there still seems to be an air of mystery (and common misconceptions) around these loans. So here are the answers to some of the most commonly asked questions about hard money (a.k.a. private capital or bridge) loans.

• What makes hard money loans different from conventional loans? Hard money loans are asset-based, which means that the property serves as sole collateral for the loan, so the value of the property is weighted more heavily than other factors, such as the borrower’s credit history or global financial situation. Private capital lenders have the freedom to establish their own lending requirements rather than having to follow those set by federal regulators as bank lenders do.

• Are the interest rates the same as those offered by bank lenders? Interest rates for hard money loans are higher (usually 9.75-15%), but other costs for the loan tend to be lower and the underwriting process is considerably faster. Most hard money loans have interest-only payments during the term of the loan with the principal due at the end of the loan, but in some situations it is possible to have money to cover the monthly interest payments included in the original loan amount.

• How does the application process differ from applying for a conventional loan? One of the main differences is that when you apply for a hard money loan you get to deal directly with the decision-maker, the person who controls the funds, not a middleman.

• What kinds of LTV rates do private capital lenders offer? Hard money LTV (loan-to-value) rates are typically 50% to 65%, but they can be based on the purchase price or the after-repairs appraisal value, usually whichever is higher, rather than being forced to go with the lower of the two as bank lenders are.

• What is a typical term of a hard money loan? These are short-term loans, often used to bridge between other financing options, so the typical term is between six months and two years.

• How much will a hard money loan cost? Lenders will usually ask that a borrower cover underwriting costs such as the environmental report and a third-party appraisal and pay origination fees of two to four points at closing. However, if a lender asks for an exorbitant upfront fee, borrower beware; it may be a lending scam.

• Will a private capital lender include money to cover property rehabilitation in the loan? Yes, in some situations, lenders can structure the loan to include additional funds to cover construction or rehabilitation costs. Borrowers should expect to present detailed estimates for the planned improvements.

• How much does a borrower’s credit matter? Private capital lenders will still ask about your credit history, but will be interested in the stories behind any potential issues (e.g., bankruptcies, foreclosures) and in your character as a borrower, rather than your particular credit score. They want to assure themselves that you are reliable and likely to repay the debt, but because hard money loans are asset-based, the property’s value is of greater importance than a borrower’s credit.

• Does the borrower need to put any money down? Yes, this ameliorates some of the risk for the lender and ensures that the borrower also has some skin in the game so that he or she is less likely to walk away if issues arise.

If you have more questions about hard money or private capital loans, check out our other blogs or contact Montegra at 303-377-4181 for more information about our private capital loan programs.