Financing with Hard Money Loans

Why Use a Hard Money Loan 

If you are in a position where you cannot qualify for a traditional business loan but you need money to complete a project or for another reason, a hard money loan may be a route you can take. Hard money loans are non-traditional, alternative sources to conventional Bank financing. They are used when you can’t qualify for financing using traditional sources of financing or you need money quickly and you can’t wait for regular commercial financing.

 

What is a Hard Money Loan?

A hard money loan is a risky asset-based loan used by individuals or businesses that cannot qualify for other types of loans to finance their capital needs. If a situation comes up in which an entity needs money they can turn to hard money loans for their needs. Hard money loans are placed with private investors or mortgage companies

 

How do you Qualify for a Hard Money Loan?

Hard money loans are not solely based on the creditworthiness of the borrower. Instead, they are based on the collateral you can offer to the lender. Your credit score is usually secondary to the collateral. Usually the entire value of the collateral is not used. Instead, a loan to value ratio is calculated for the hard money loan. The loan to value ratio is a percentage of the property’s value. If the collateral you offer for the loan is not enough to secure the loan, you may have to offer up other real estate assets to secure the loan.

 

What is a Loan to Value Ratio?

A loan to value ratio for a hard money loan is calculated as the loan amount divided by the value of the property. The higher the ratio, the more difficult it is to get a loan. Usually, hard money lenders loan only about 70% of the value of the property. The loan to value ratio is a measure of risk for lenders.

Here’s an example. Let’s say that John Doe wants to take advantage of a project that costs $700,000. He needs to borrow $350,000 in order to invest in this project, but can’t get the money from any traditional lender. He approaches a hard money lender who calculates their loan to value ratio. Their ratio is $350,000/$700,000 = 50%.

 

What is the Interest Rate and Other Terms on a Hard Money Loan?

Interest rates are higher on hard money loans than they are on traditional loans. The reason is that hard money loans are riskier than traditional loans. The other terms on a hard money loan are also less favorable than on traditional loans.

Interest rates may start at around 8% and go all the way up to 12%. Borrowers also usually have to pay 2% – 5% in points. 70% loan to value is usually the maximum loan to value ratio a hard money lender will accept. A balloon payment may be required somewhere along the way. The term of the loan is usually short – as short as 1-5 years.

 

Hard Money Lenders

Hard money lenders are individuals or companies that have funds available for investment. To be a hard money lender, they have to be flexible and able to move quickly to take advantage of lending opportunities in the marketplace. They are not restricted to the rigid criteria of traditional business loans and traditional business sources.

Although you may have to go through several hard money lenders to find one that suits your needs, all you have to do is a simple search on the Internet to find hundreds of companies that engage in hard money lending. Give us a call at California Private Money Lenders 707-315-1119 or fill out our contact form, or borrowers application form, and one of our staff at California Private Money will be in touch with you promptly.

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