A hard money loan is a specific type of assets-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans, starting at 7.7% because of the higher risk and shorter duration of the loan.
Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers.
The loan amount the hard money lender is able to lend is determined by the ratio of loan amount divided by the value of property. This is known as the loan to value (LTV). Many hard money lenders will lend up to 65–75% of the current value of the property.
The hard money loan mortgage market has greatly expanded since the 2009 mortgage crisis with the passing of the Dodd Frank Act. The reason for this expansion is primarily due to the strict regulation put on banks and lenders in the mortgage qualification process. The Dodd Frank and Truth in Lending Act set forth Federal guidelines requiring mortgage originators, lenders, and mortgage brokers to evaluate the borrower's ability to repay the loan on primary residences or face huge fines for noncompliance. Therefore, hard money lenders only lend on business purpose or commercial loans in order to avoid the risk of the loan falling within Dodd Frank, TILA, and HOEPA guidelines.
Because the primary basis for making a hard money loan is the liquidation value of the collateral backing the note, hard money lenders will always want to determine the LTV (loan to value) prior to making any extension of financing. A hard money lender determines the value of the property through a BPO (broker price opinion) or an independent appraisal done by a licensed appraiser in the state in which the property is located.
The interest rates on hard money loans are typically higher than the rates charged for traditional business loans. The interest rates could range from 10% to 18%. Despite this, such loan options are popular for their fast approvals, higer flexibility, less tedious documentation procedures and, at times, the only option for securing funds
