The most important thing to know about hard money loans is that they are not for every project. Hard Money Loans are also called Bridge Loans by many lenders. These loans are best for short-term projects with equity that need quick, efficient financing and don’t fit inside the confining box of bank lending guidelines. Such loans are available from private lenders, typically individuals or investment groups, who have set up programs to fund real estate investments. Hard money (or bridge) lenders are willing (unlike banks) to look beyond the credit history of a borrower to focus on the value of the hard assets that will serve as collateral for the loan. Because these lenders are not tied to an institution, they are free of the red tape, mountains of paperwork, and lists of regulations with which banks must comply.

The advantage of a hard money loan is that it can be based on the higher of the purchase price or the property value, rather than the lower as banks must do. In addition, private lenders will often use the property’s after-repairs value rather than its current market value to determine the loan-to-value (LTV) ratio, which will result in a higher loan amount than you would get from an institutional lender since they have to use the lower current market value to determine their LTV.

Basic Loan Structure Overview

While loan structures and terms will vary from lender to lender, this overview presents a recent hard money loan made by Montegra, a Denver based bridge lender, on a former church property in Denver as an example.

Loan: $500,000

Term: one year

LTV: 64%

Fees: 2 points

Interest Rate: 10.25%

The loan origination is typically paid upfront at closing. However in certain circumstances the Lender may agree to collect the loan origination fees when the loan is paid off. The monthly loan payments (spread over the life of the loan) are interest-only. Many hard money lenders are willing to establish an interest reserve as part of the loan and set aside enough loan principal to make the interest payments over the length of the loan so the borrower does not have to make these out of pocket. The loan is paid off with a balloon payment at the end of the term, or when the property is sold or refinanced, whichever comes first. Another benefit of hard money loans is that they rarely charge pre-payment penalties although many lenders will require a certain amount of interest be paid during the term of the loan. For example, during a one year loan, Montegra typically requires that a total of six month’s interest be paid and then, after the first six months, there is no prepayment penalty.

Keep in mind that terms and loan structures will vary from lender to lender; however, private lenders are more willing, and more able, to negotiate terms with borrowers. They also want the project to succeed, so they are flexible in their structuring so that the loan can be made to fit the borrower and project, rather than forcing the borrower and project to fit the loan.

If you have a commercial loan request or any questions about Montegra’s private capital loans, contact us at 303-377-4181.