What is hard money
Hard-money or hard-equity refers to lending with little documentation or zero documentation on investment property. Unlike conventional financing hard-money lenders often lend to borrowers with no credit reports, zero bank statements and no tax returns. These types of loans close extremely fast, and as quick as 7 days from the time of application (because of the fact there is little due diligence). This type of financing usually has unfavorable terms compared to traditional lending. The terms that encumber these types of loans are often interest only bridge loans, high in (points and junk fees) closing costs. Loan to value is low compared to traditional financing, usually 50 to 65% on the lesser of the appraised value or purchase price. Typical interest rates vary from 9 to 12.5% interest only payments for 12, 24 or 36 months. There is anywhere from 2 to 6 points charged on these loans either at closing or at the exit of the loan.
Investment property includes non-owner occupied, either residential or commercial property. The real estate usually goes in the name of an LLC even if it’s residential property and becomes (an entity of a corporation) commercial financing. The reason why these loans are for investment property only is because it needs to be viable for the lender to absorb should the borrower default. The property is much easier to foreclose on when a judge is not making the decision on whether to kick a family out of their home. Without a property that is easily absorbed with a borrower in default, there is not sufficient collateral for the lender. States such as California and Florida have a homestead tax exemption, if the property is under homestead tax exemption it is obviously owner occupied and not eligible for zero documentation hard-equity lending.
There are many reason someone may look for hard-equity financing. One of the main reasons is investors looking to fix and flip on the property. After renovating the property, they can turn around and sell it for a reasonable amount or profit without having to put so much money down to buy it. Another reason is someone may want to pull some of their equity out of the property and they either don’t qualify for traditional financing or they need the cash fast. Another scenario is borrower may be a foreign national with zero established US credit or maybe it’s a US citizen that simply unable qualify. Yet another scenario may be that the borrower’s debt obligations are too high or their taxes weren’t filed correctly and they can’t close on time. Hard-money may be a better option than losing their deposit of earnest money on the sales contract. There are many reasons one may be looking for this very niche loan product.