Hard money loans, sometimes called “bridge loans,” are significantly different from bank or life insurance company loans. Banks and life insurance companies have significant regulations from both state and federal governments, and their loans must conform to these regulations. However, hard money loans are made by non-bank lenders who are not burdened by these regulations. Banks are forced to carefully examine the credit history of their borrowers, understand the “global investments” of their borrowers, and review and document the cash flow of the borrower.

The hard money lender, instead of relying on the cash flow and credit history of the borrower, relies on making a conservative “loan-to-value (LTV)” loan. If a property appraises for $1,000,000, a bank may lend up to $800,000 to $850,000 (80–85% LTV), while a true hard money lender normally would not lend over $650,000 (65% LTV). The hard money lender makes what is called “an asset-based loan,” while the bank makes what is called a “credit-based loan”.

What are the risks of hard money loans?

Although it may seem counterintuitive, hard money loans may be less risky than credit-based loans for the lender. In a typical hard money loan, the borrower has at least 35% equity in their property compared to the loan amount. Borrowers are much less likely to give a property with this much equity back to a lender. An individual’s credit can change almost overnight. The value of a real property is much less likely to change significantly in a short period of time. In the example above, a borrower with $350,000 of equity in their property is less likely to give it to the lender than a borrower with only $200,000 or even $150,000 of equity.

What are the major differences between a hard money loan and a bank real estate loan?

Hard money loans typically have somewhat higher interest rates than bank loans. If a bank charges 6 to 8% interest for a real estate loan, a hard money lender will charge between 9 to 12% for their loan. This is not an exact apples-to-apples comparison. Banks frequently require their loans to be amortized over a 5-to-10-year period, while hard money loans normally require interest-only payments. This means that the monthly payment of an interest-only hard money loan may not be that much higher than the monthly payment of an amortized bank loan.

Are hard money loans a good idea?

Compared to bank loans, there are several arguments for and against hard money loans.

Negatives of hard money loans include:

• Shorter loan terms: Hard money loans typically have much shorter terms—often 1 to 2 years—compared to bank loans, which may offer terms of 5 years or longer.
• Higher interest rates: Interest rates on hard money loans are generally higher than those offered by banks.
• Greater foreclosure risk with the wrong lender: Choosing an unreliable hard money lender could expose you to a greater risk of foreclosure compared to traditional bank financing.

Positives of hard money loans vs bank loans include:

• Faster funding: A hard money loan can often be funded in as little as one week, making it ideal for borrowers who need to close quickly. Bank loans, on the other hand, can take weeks or even months to underwrite and close.
• Interest-only payments: Hard money loans usually require interest-only payments, which can improve cash flow compared to amortized payments required by banks.
• Stronger negotiating position: In competitive real estate markets, the ability to offer a fast, low-contingency closing with hard money financing can help you secure a deal.

How to find the right hard money lender?

Of all the factors in deciding between a hard money lender and a traditional bank, the most important is finding a reputable lender. Here are some tips:

• Choose local over national: Local lenders have a reputation to maintain in their community, while national lenders may be less concerned about their local reputation.
• Experience matters: Look for a lender with many years of experience. A company that’s been in business for decades likely has a solid foundation.
• Ask for referrals: Talk to your realtor, banker, attorney, or CPA. These professionals can guide you to trustworthy private money lenders.

As Robert Frost said, “That can make all the difference.”

Discuss Your Colorado Hard Money Loan With a Lender Today

Montegra Capital has been in continuous business in Denver for over 50 years. We are known for our speed in underwriting and funding hard money loans, for offering these loans at the lowest end of private money lending interest rates, and for our reputation as the gold standard of private money lenders in Colorado. Email Bob Amter (bob@montegra.com) or Kim Skari (kim@montegra.com), or contact us online to discuss your loan request.