Don’t let conventional loans become your default financing choice the way one search engine becomes your default portal to the internet. The result can be a limited experience and narrowed perspective. Hard money loans (frequently called “Bridge Loans”) can be a good fit for commercial real estate investments, but many borrowers may not consider them an option because of the myths that continue to cling to hard money and private capital lenders. The term “Hard money lender” is often appropriated by brokers disguising themselves as lenders. This results in a borrower paying double origination fees which is unnecessary if the borrower does sufficient research to be sure they are dealing with the “direct lender” and not a loan broker.

A true hard money lender relies on what is called asset-based underwriting. Asset based underwriting places primary reliance on the value of the property that will secure the loan and less reliance on credit based or cash flow based underwriting standards.  Low FICO scores, bankruptcies, foreclosures, and short sales are not necessarily deal breakers for the private capital bridge lender. These private money lenders are also portfolio lenders, who keep their loans in-house rather than selling them off to another institution or lender. I In terms of loans on single family residential properties, private money lenders will typically only lend on non-owner-occupied properties. Many private money bridge lenders only lend on “fix and flip” residential properties. Some private lenders will consider both commercial and investment residential. Do your research before contacting them.

Many real estate borrowers incorrectly view hard money loans as the last-resort financing for a bad -credit borrower.   If the real estate investor is self-employed it can be difficult to provide the proof of consistent income that bank and conventional lenders require. This is not typically problematic for the private money lender.

Another advantage of hard money or private capital lenders is that their faster underwriting process that allows investors to capitalize on time-sensitive deals. Private lenders can often fund a loan in two weeks (or less in certain circumstances), whereas bank and conventional lenders are hard-pressed to approve a loan in less than six to eight weeks.

A couple of the myths about hard money loans are that they tend to be high loan-to-value (LTV) deals or small-balance loans. This is fake news. In fact, most private lenders will provide loans of 60 to 65%  LTV.   Many private money lenders will be willing to use the “after-repairs value” to determine the amount of your loan rather than the purchase price. Loan amounts vary greatly depending on the lender’s resources, ranging anywhere from $100,000 to $5 million or more. One of the important facts to remember is that when working with the hard money lender you, the borrower, get to deal directly with the decisionmaker who controls the money rather than an intermediary.

One last myth to dispel is that hard money lenders’ willingness to overlook low credit scores indicates a lack of due diligence. This is also fake news. While private lenders may not conduct as strict of credit checks on their borrowers as the bank and conventional lenders, they will do in-depth research into the asset and title that will secure the loan. This will often require third-party appraisal of the property (even if you provide one with your loan request) and title insurance. They will also want to know that the borrower will have the funds to pay the interest-only payments during the term of the loan.

If you want to know more about Montegra’s hard money loan programs, contact us at loans@montegra.com.