In today’s world, commercial mortgage brokers often employ a financing tool referred to as a hard money loan. This type of instrument, which can be categorized under the larger umbrella of private lending, is well known to seasoned brokers and their clients, who are usually familiar with the nuances of hard money loans. Still, novice brokers and investors may require more information on the topic to determine the best choice for their ventures.
Hard money loans, also known as bridge loans, are short-term funding solutions for commercial or investment properties. The money doesn’t come from banks or other traditional lenders but rather people or private companies that accept real property as collateral.
“Brokers need to be cautious due to the lack of regulation within hard money lending. While this allows for fast dealmaking, it also means that the industry is under less scrutiny than other lending sectors.”
The community of commercial mortgage brokers is the largest source of leads for hard money lenders. Mortgage brokers frequently recommend hard money loans to clients who seek capital for homes and businesses. They also serve as excellent referral sources because they connect with many borrowers and real estate agents.
Hard money loans offer both challenges and solutions that mortgage brokers need to be aware of. While these lenders can fund deals much more quickly than traditional institutions, they typically charge higher interest rates and are not subject to the same level of oversight as banks or credit unions. These are just some of the numerous aspects of hard money that mortgage brokers need to know.
Fast and flexible
One of hard money’s main benefits is the speed with which a loan can be approved and funded. In many circumstances, hard money loans can be approved in as little as a couple weeks — and sometimes even faster. The hard money lender will consider the cash-flow ability of the property, the amount of equity the borrower will have in the property, and the borrower’s prior experience.
The lender will also consider the borrower’s exit strategy and whether they have sufficient cash reserves to make on-time loan payments each month. Providing that everything in these categories checks out, they are likely to approve the loan request.
The speed of this funding channel has saved many mortgage brokers who needed rapid financing resources for their clients. The accelerated procedure allows for quicker results and empowers brokers to successfully serve time-sensitive prospects.
In contrast to banks, hard money lenders don’t have to deal with many regulations and other requirements. They focus on borrowers who have adequate equity in their properties, enough money on hand to cover the monthly payments, workable exit strategies and appropriate expertise in these deals. Hard money loans are a handy tool for mortgage brokers who wish to serve a broader spectrum of clients, due to the lenient standards that allow borrowers with poor credit or unusual income sources to be approved.
Hard money downsides
Hard money loans offer a lot of flexibility, but this comes at a price. Interest rates will always be higher than those for traditional loans. Hard money lenders take on more risk by granting the borrower the comfort of fast access to financing for their real estate venture. In this light, too, borrowers may find it more costly to repay the loan due to adjustable interest rates, which may restrict their choices or reduce the earning potential of their real estate holdings.
Hard money loans tend to have lower loan-to-value ratios (LTVs) than traditional bank loans. A hard money loan may offer an LTV of 50% to 75%, whereas a traditional loan may have an LTV of 80%. These loans are specifically designed to be short term in nature and generally last anywhere from six to 18 months.
A short-term loan can put pressure on the borrower, especially if there is a disruption in their original business plan. The quick maturity is why hard money loans are often used by borrowers who intend to relist their investment property as soon as possible.
Things to consider
Before submitting an application for a hard money loan, mortgage brokers need to know the value of the property in question. As already discussed, real estate serves as collateral for a hard money loan and the value of the property will help determine the maximum size of the mortgage.
Brokers need to be cautious due to the lack of regulation within hard money lending. While this allows for fast dealmaking, it also means that the industry is under less scrutiny than other lending sectors. Brokers must investigate each lender thoroughly to verify their reputation and to understand all of the paperwork involved. Don’t be afraid to ask the lender for referrals to past clients.
Brokers also must consider elements such as the property’s location, price volatility and the possibility of future growth in value. Determine the borrower’s capacity to oversee the property or effectively carry out their investment goals. Ensure that your client is at ease with the associated degree of risk by carefully evaluating the possible dangers.
In addition to hard money lenders, investigate all possible funding options. Be sure to look into banks, credit unions and other capital sources to make sure you have found the right lender for your client. Weigh the advantages and disadvantages, and assess the eligibility requirements of multiple options.
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The success of hard money lending begins with the mortgage broker, who needs to structure deals around the needs of their client. By collaborating, brokers and hard money lenders can reassure borrowers that they’ll be able to find an answer, regardless of whether the request involves a temporary loan to pay off a maturing loan, money to finish a fix-and-flip project or financing for new construction. ●