Hard Money Loans vs Commercial Bridge Loans

Typically the term Bridge loans and Hard Money loans are been confused by people in the past

as being the same thing because they have some points in common and some points that makes a big difference. Bridge loans are usually are generally given for 1 to 2 years period, whereas Hard Money is anywhere from 6 months to over 5 years.

Both bridge and hard money loans have higher interest rates and neither is considered as a permanent loan because these loans are utilized when conventional loans did not work. These loans help property owners achieve their goals involving non-bankable processes like:

·         Rehab or add-on a commercial property

·         Time to lease out or rent a commercial property

·         Pay discounted loans payoffs quickly

·         To lighten DTI ratio (Debit To Income Ratio) payoff the debit

·         Cash out facility to purchase investment property

The Differences

The major difference between them is FICO Score; a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts. Bridge loans are in box type of loan and require a FICO score of 625 or more. The lender will take anywhere from 2 to 4 weeks to close your DSCR (Debt Service Ratio) will be considered and it could be the make or break point on whether you qualify for a Bridge loan.

The rates are normally between 7 to 9% and it is fixed for a period of time. LTV (Loan to Value) ratio is between 60 to 65%. Prepayment penalty could be anywhere from 6 months to the whole term of the loan.

Hard Money Loans

When you cannot qualify for other types of commercial loans California Hard Money Lenders are there to help you. Hard money lenders are able to give you loans quickly. It will take about 5 to 10 business days to complete the process. Interest rates are from 8 to 11% based on the equity in property, higher the equity lower will be your rates. LTVs are 55 to 65% maximum and prepayment penalties are normally 6 months on a 1 year loan to 1 year on a 2 to 3 year loan.  The good thing about Hard Money is everything is negotiable and it can fit any situation and give the property owner exactly what he needs to achieve in his future objectives.

Private Financing - What It is

Private financing is basically financing your business with the help of private individuals or parties, not by the traditional banks. This type of financing is generally used for personal, investment and commercial purposes. Several sources of private financing includes private and hard money lenders, investment groups and venture capitalists. Private financers are also known as “Angel investors” as they help you when no one supports you.

Private financing is one of the best source of funding in US. The California hard money lenders are well known lenders in the town. California is known as the headquarters of private lenders, many lending companies deal borrowers with professionalism. Private lenders are different from bank loans, banks usually give you loan after a long verification process. Whereas private lenders doesn’t require such verifications, you have immunity over income verification.

Private financing obtained during exchange for stock are an excellent way to get the initial operating capital needed for a startup business, but can be it will expensive in the end. While you are not likely to be paying interest in the early stages of your business, you will pay dearly should you become a success.

All the real estate investors requires capital to complete business transactions. In situations when you don’t have money for finishing business deals and you need it in short time, if you contact a bank for loan, will take considerably long time to approve. Now this is where hard money comes in handy. Since these companies are owned by private individuals so they give more attention to their customers. This lending process doesn’t require income verification form you and it doesn’t require large documentation process needed for applying a loan. Another advantage is that hard money lending is a fast process so it saves time of customers and investor.

It doesn’t matter what method you have chosen in obtaining private financing, you will find that companies are more flexible in lending criteria as compared to banks. Check out private financing companies and brokers online to see which will suit your business needs most effectively.

To conclude, if you don’t have anything in your pocket and need 100% financing to start your business or you want a loan to restart your previous business then hard money loan is a best option for you to complete your goals and dreams.

Hard Money Loans vs Bank Loans

Hard money loans are much different from traditional lenders and banks. One of the best ways to understand hard money lenders and the private investor loans they offer is compare them. The following table below shows parties, processes and terms common to one or both types of lending and compares them in relation to each other.

Party/Process/Term	Bank Loans	Hard Money Lenders
Agent	Typically sells real estate but might originate loans as well if licensed by their state and registered federally as a Mortgage Loan Originator.	Used rarely unless the sale of real estate is involved as part of the loan transaction.
Broker	Licensed as a real estate broker.  Agents freeze their license with a broker. Typically the highest licensing designation.	Same as bank loans
Loan Officer	Normally an employee of a bank, mortgage broker, mortgage banker, or large commercial lender who originates loans.  Licensing requirements may vary depending on the type of institution and their state and federal licensing.	Not a term used by hard money lenders.
Loan Broker	Same definition as Mortgage Broker.	A licensed broker specializing in brokering hard money loans.
Mortgage Broker	Works with 3rd party institutions to search conventional loans in order to meet your needs.	The term is used rarely because they are typically offering their own loan products so there is nothing to “broker.”
Mortgage Banker	Normally works along 3rd party institutions to fund loans but will primarily fund with their own money or through a pre-arranged credit line.	Loans funded with their own funds, a pool of funds they manage, or line of credit.
Hard Money Lenders	N/A	Broker who runs a specialized business dedicated to originating private money loans.  These people are often referred to as private money lenders.
Programs/Guidelines	Set as per government agencies like: Fannie Mae, Freddie Mac, FHA, VA, USDA, State Housing Agency, and some in-house “portfolio” lending programs.	Hard money loans are customized to borrower’s needs based on loan and collateral criteria such as LTV and DTI. Typically it is more flexible and faster than Conventional lenders.
Borrowers	Good credit history with easily documented income sources.	Non-traditional income and self-employed sources are accepted.  Income is analyzed differently and possible exceptions are made for past credit flaws.
Eligible Property Types	Single family homes, 2 - 4 unit and some other types of commercial property.	Other properties that fall outside of the conventional parameters like rehab loans, construction loans, bridge loans, occupied rentals used to secure startup capital for new ventures.
Vesting	Always in the individual borrower’s name.	Is more flexibility and generally permits vesting in trusts, limited partnerships,  Corporation, and LLCs.
Due Diligence	Minor to none.  Review of initial disclosures and final documents at signing with terms expected.	Extensive research of collateral and borrower’s entity is done.  Personal guarantee and Opinion Letter is generally required.
Loan Costs/Closing Costs	Normally 1 - 2% of the total loan amount.	Can be as high as 3-10%, depending on the loan amount.
Servicing	Handled by the institution who have originated the loan.  Often, one institution will sell the servicing rights to a larger firm which specializes in servicing.	Typically the private money lender who originated the loan, or a smaller servicing company.
Non- Monetary Loan Covenants	Covenants are required to be met during the loan process.  Covenants vary by lender, but typically include financial reporting, and the maintenance of various ratios like; loan to value and debt service coverage ratios.	Similar, but may be more strict, depending on lender.
Interest Rates	Rates are typically competitive between lenders, and are generally lower than private lending.  Most customers turn to private money loans not for the rate, but because the loan is otherwise unavailable.	Rates start at 8% and go up based on unique criteria of each

How to Deal with Hard Money Lenders

Dealing with lenders

Despite their name, working with hard money lenders is much easier than with their conventional counterparts e.g. banks. The majority of these lenders are focused on bringing flexibility and transparency to business deals as well as restricting the amount of red tape that borrowers have to deal with. Nonetheless, here are a few secrets to getting the best deal when you’re negotiating your hard money loan:

Know how hard money works:

Hard money loans require a tangible asset to secure the loan (i.e., act as collateral). The term hard money is typically used to refer to real estate secured loans.  The lender determines the viability and amount of the loan based on the value of the property rather than the credit history of the borrower.

Know where the funds come from. 

Private lenders fund loans with their own capital. This allows them to make decisions directly without consulting with a third party (such as a loan committee).  Borrowers need to understand the difference between a direct hard money lender and a loan broker.  A direct lender actually controls the money to fund the loan and can indeed make decisions without consulting with a third party.  However, many loan brokers represent themselves to borrowers as direct lenders when they are in fact just a middle man between the actual lender and the borrower.  This means that the broker has to collect the information and send it on to the actual lender who in turn makes the decision to fund or not.  This creates delays in getting a go/no go decision.  It also adds another layer of fees that the borrower will have to pay.  The broker will take a fee and the lender will take a fee.  Borrower should make every effort to find out if the lender they are thinking f working with is a true direct lender or is a loan broker misrepresenting themselves as a direct lender.  A direct hard money lender needs to impose stricter terms and higher interest rates than conventional lenders in order to protect their investment. Banks do extensive research into the borrower’s past tax returns, bank balances and reviews all their sources of income and expenditures.  Hard money lenders just look at the property.  Borrowers should also be aware that hard money lenders are not governed by banking laws, which allows them the freedom to underwrite loans that conventional lenders would reject.

Research your lender:

You can often find testimonials and starting terms on the lender’s website. You can also call and ask for references; reputable hard money lenders will be happy to provide you with this information. It can also be a good idea to call with your loan request or to email a loan summary prior to setting up a meeting.

Prove your project’s value. 

Before meeting with a lender, you should be prepared to prove the value and viability of your business plan. You will be dealing directly with the decision-maker; therefore, it’s important to show that you know what you’re talking about and can back up any claims about the value of the property (especially the resale value) with actual numbers. While private lenders require less documentation than conventional lenders, they will still want to see financial statements, especially for income-producing properties. Also, while not usually necessary to close the deal, good credit history can sometimes help influence the interest rate they offer you.

Have an exit strategy. 

The high interest rates of hard money loans mean that it is in your best interest to pay it off in full and on time. Most lenders will want to know how you plan to repay the loan before even agreeing to lend you the money. It’s also a good idea to be diligent in meeting any and all deadlines set by your lender as it will make them more willing to agree to an extension in the event that you need more time.

Borrowing from Hard Money Lenders for Real Estate

Looking for quick loans appears to be an excellent opportunity for the real estate investment deal means that you cannot get money quick enough from the local lender. You have a limited time to close a good deal but also need a way to come up with the cash to complete transaction. You need to find hard money lender to get funds quickly.

If you are in urban area and you know that there are real estate clubs around. There doesn’t seem to be any other choice so you have to see them, keeping in mind that they may be willing to help you if it is a good one. Private investors could deliver the money within as early as five days.

 It is important when dealing with private investors is to show them that it is a good deal, doesn’t matter if you are not able to pay them back. For any reason if this happens, there has to be a considerable equity in the property, which will enable them to earn profit even if they have to take the property back from you for lack of payment. Even after that, you will be able to borrow only 65% of the property’s value after it has been fixed.

A big part of their consideration of hard money loan is the value of property, not your credit score. Usually they look at your credit score, the biggest factor is the collateral. As they are in for money, they are pretty sure that they will make a profit even if you don’t. But if you handle it in a right way, your investment in a good deal should also yield you a lot of profit back to you too. The amount of profit you will get depends on your expertise in real estate transactions, the market analysis, and of course the amount of interest you pay to the hard money lender.

It is also very important to know the difference between hard money broker and hard money lender. A hard money broker is a middle man between borrower and the lender. They usually charge a fee upfront to put you in contact with some private investors and it may not be refundable. However a private lender has their own money and they will use to help you finance the deal.

First the California hard money lender will evaluate the property before agreeing to give you a loan on that property. It is your responsibility to ensure that the amount you have asked for this is in line with the typical private investor’s expectations. Learning how to do this will come with time, and from talking with other people who frequently deal with hard money investors. Remember that they are in it for a profit too.