Alternative Financing Options With Hard Money

These days financing for real estate transactions can be a challenge.  The banks have tightened their lending standards to the point where even quality borrowers may be unable to obtain the loans they need.  This is compounded further among the smaller community banks, which make a lot of the local commercial, mixed use and other real estate loans that are not secured by an owner occupied single family residence.

For those with financing issues, a potential alternative is hard money.  There are both pros and cons to using hard money.  The benefits include looser qualification standards.  For non consumer loans, often times you can qualify without much paperwork.  On commercial properties, the debt coverage ratio does not determine whether a loan can be made or not.  For self employed borrowers, low or no doc options are available.  Additionally, there is the opportunity to get creative with hard money financing.  

Cross collateralization is an option that many banks don't consider, but with hard money it is a very viable option. In addition, properties in need of repair or rehab can be financed.  Closing a loan on a rehab property that has major repairs needed, even section one and two items, is a reality.  In addition, closing on these properties using a fair market or after repair value as a loan to value basis (rather than the purchase price) is a possibility (see our breakdown here of rehab loans).  All of this flexibility means more opportunity to close loans that banks simply cannot these days.

Of course there are trade offs.  At the top of that list is the cost.  Hard money loans are typically more expensive than bank loans.  Points are charged on practically all hard money transactions.  These can range from 2 or 3 on up to ten or more in some cases.  The interest rate is also notably higher, with typical rates ranging between 10% and 14%.  The length of term is also a trade off, with most of these loans being interest only with a balloon payment due after anywhere between one and five years.  Finally, while the qualifications are much more loose than the banks require, hard money lenders are going to require much more equity in the deal.  Most loan to value ratios on hard money these days are going to cap out at 60% max, often times less.

For many quality borrowers who have either hit a rough patch, or have a temporary issue obtaining financing, hard money can be a great option.  When used as a bridge loan to bridge the gap between the present and some point in the future when bank financing can be obtained, this alternative form of financing can allow borrowers to take advantage of the current real estate market.  For more information, please visit our hard money loans page.