Are you interested in learning more about “hard money”?  Have you read Wikipedia’s article?  If not, you should.  The have the concept down pretty well.

Their one sentence definition reads:  “A hard money loan is a specific type of asset-based loan financing through which a borrower received funds secured by the value of a parcel of real estate”.  Good definition.

As a Colorado hard money lender for 42 consecutive years, here is some of the hard money information that I found valuable in Wikipedia’s article.

A hard money loan by any other name is still a hard money loan – or is it?

One of the confusing things about hard money is the number of different names that refer to the same thing.  Here is a list:  Asset-based loan – private money loan – bridge loan – non-conforming loan.   All of these “loans types” are basically hard money loans. Wikipedia makes the following distinctions – which for the most part are valid:    “Bridge loans” typically refers to loans against commercial property.  “Non-conforming loans” typically refer to loans against residential property. “Asset-based loans” refer typically to the fact that hard money lenders normally make the decision on how much to lend by using a conservative ratio of the loan principal to the appraised value of the commercial real estate property. All of these terms at the end of the day are taking about a hard money loan.

Where does the term “hard money” come from?

Contrary to what you might think the term “hard money” doesn’t originate because these loans have higher interest rates or higher loan fees than other loans.  The term came into common use because a hard money loan is “hard” to underwrite.  There are lots of difficult issues involved with loan requests that a bank or life insurance company simply wouldn’t want to deal with.  These issues are typically called “hair” as in “that loan has a lot of hair on it”.

What is a “soft hard money loan’?

As for commercial lending, many lenders are now offering what is sometimes called “soft hard money loans”.  These are loans that still are primarily “asset based” – i.e. funded using a conservative ratio of the amount of loan principal to the appraised value of the property.  The difference between a soft hard money loan and a hard hard money loan is the attitude of the lender and the interest rate and loans fees they charge.  According to Wikipedia a traditional “hard money” lender might charge interest anywhere from 11.5% up to 21% and loan fees in the 4% to 10% range. Warning:  a traditional “hard money lender may sometimes fall into the undesirable category of a “loan to own” lender. This is a lender that you don’t want to borrower from! A “soft hard money lender” doesn’t want to own properties, but instead is looking to create a safe higher yield investment for its capital sources.   A “soft hard money” lender will charge interest in the 9% to 11% range with loan fees in the 2% to 3% range.  On larger loans the interest rate and loan fees may be even lower.  Full disclosure:  Montegra is a “soft hard money lender”.

Other interesting  hard money information to learn from Wikipedia:

Historically, the term “hard money” is used exclusively in the U.S. and Canada.  Wikipedia states correctly that there are few states or federal laws regulating this industry, but does not make it clear that non-regulation applies only to commercial real estate loans. There are great many state and federal laws that apply to any consumer loan made on residential properties.  These laws are so restrictive that “hard money lending” on owner occupied residential property has almost vanished. There has been a severe crack down on what has become known as “predatory lenders” – a term that normally applies to lenders who make higher interest rate loans against single family owner occupied properties.

Bottom line:

Wikipedia does a good job of outlining this area of lending. Anyone interested in learning more about it should take the time to read it.  As we have often said in earlier blogs – hard money can be a useful tool if used for the right reason with the right lender.  Do not fail to do as much research as possible on any potential hard money lender before doing business with them.  In today’s world it is easy enough to learn about lenders.  If possible, use a local lender instead of someone in another state.  Take advantage of the internet — ask your banker, attorney, CPA and commercial Realtor – do your homework!

This video is by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.