The roots of the private lending industry can be traced back to the mid-twentieth century when the lending industry underwent a major overhaul that changed how loans were presented to prospective borrowers and saw regulations put into place on the banks and other institutional lenders. Recent crashes and recessions have forced additional reexamination upon the real estate lending industry along with stricter regulations. Hard money loans used to be associated with cold, hard cash and shady loan sharks who charged exorbitant rates and fees or employed other deceptive lending practices. However, in the aftermath of the subprime mortgage crisis, the negativity surrounding these lenders has faded away as they have shown themselves to be a crucial tool that borrowers can leverage to secure financing for investment properties and other commercial real estate projects. 

So what does the hard in hard money refer to? It’s a reference to the fact that these loans are secured by the hard asset rather than a borrower’s credit. This means that hard money or private capital lenders are much more interested in the property that you want to purchase or pull cash out of rather than your own credit history. They will want to know everything about the current condition of the property as well as what you plan to do with it and how you plan to pay back (or exit) the loan. And often, you will find that private capital lenders will offer lower loan-to-value (LTV) rates—ranging from 50% to 65%–and expect higher down payments because they want to be assured that although they may be overlooking a shaky credit history, the borrower has enough skin in the game that he or she will stick around and see the project through rather than walking away at the first sign of a hurdle or obstacle. Overall, you’ll find that private capital lenders will finance higher risk projects than other lenders do, but this is in large part because they counter those risks with lower LTV rates and higher interest rates.

So what are the benefits of using hard money loans? The higher costs of hard money loans don’t mean that these loans always have to cost the borrower. In exchange for these costs, private capital lenders offer faster turnaround times and highly customizable loan products. This can allow borrowers to purchase properties that are in high demand, fielding multiple offers or to participate in auctions that usually require cash payments. The flexibility of their lending programs can also allow the loan to be shaped to fit what you need for your project (e.g., funds to pay for rehabilitation) rather than forcing your project to fit the requirements of the lender.

If you have more questions about hard money or private capital loans, contact Montegra at 303-377-4181. We can also share specifics about the terms and guidelines of our private capital loan programs for the Colorado region.