Top 8 Reasons Borrowers Choose Hard Money Loans

Not every real estate project that requires financing fits into conventional lender guidelines and limits. In these situations, the risk increases for lenders and their willingness to lend decreases substantially. These non-cookie-cutter deals require borrowers to seek alternative financing options such as hard money loans.

The rates for hard money loans are higher, but in the up and down markets of real estate, hard money lending sources have played a large role in keeping the real estate market moving forward.

Here’s some common reasons to choose hard money:

1. The real estate asset is not bringing in cash-flow.

Conventional lenders typically underwrite their commercial real estate loans based off a property’s operating statements, cash flow and net operating income (NOI). Because the asset does not produce income or does not produce enough income, the risk to a lender is understandable higher. Hard money lenders are not restricted to a debt-service-coverage (DSC) analysis. They can look at the value of the underlying asset more than the income it brings in to determine their lending capability.

2. The borrower needs a higher loan amount.

Gap financing lenders have the flexibility to offer higher leverages in comparison to conventional lenders, who are restricted by their guidelines and underwriting parameters. That’s not to say hard money lenders don’t have their own lending limits. They do have loan- to-value (LTV) limits as well. But if the value of the real estate property supports the loan, there is a greater chance of getting higher loan dollars than through a bank that tends to be more conservative.

3. Quick closing needed.

When issuing commercial real estate loans, conventional lenders usually advertise a 45-90 day loan process, from loan application to loan closing. The buyer may not want to risk the opportunity (and their earnest money) to buy a property by their purchase contract closing date. Hard money lenders need much less documentation and don’t require the same level reviews to close a loan. This streamed line approach cuts the closing time significantly.

4. Cheaper than using equity.

A loan with a 10-18% interest rate and 2-4 points up front is generally not considered cheap money. However, that can still be substantially less expensive than what it would cost to bringing in equity from a joint venture partner or other equity source. In addition to interest on the money, an equity partner would likely want ownership of the project as well (not to mention decision rights, too!). This would significantly change a real estate owner’s return on investment.

5. Conventional lender underwriting guidelines.

As mentioned, conventional lenders have their specific lending parameters and underwriting guidelines. These guidelines are based on factors such as: asset class, loan size, location, neighborhood makeup, and market trends, just to name a few. In contrast, a hard money loan provider is not restricted to any specific set of guidelines. They are free to lend on any project they see fit.

6. Need for short term financing.

By definition, hard money loans, also sometimes referred to as bridge loans, are short term loans. A commercial real estate owner may be looking to develop a property or they may have an agenda then only requires financing for a shorter period of time. Hard money loans typically have 1 year maturities up to 3 years.

7. Borrower’s credit score.

For commercial real estate loan borrowers, having a credit score below 650, can eliminate most conventional lenders as lending options.

8. Property challenges.

The loan applicant(s) may be perfect candidates, but the project or commercial property may not be ideal. For instance the property may have environmental issues that are evidenced in a Phase I or Phase II report, an appraisal report, or site visit. The project may be located in a market that is not established, or changing neighborhood. The owner may be looking to re-position a property that could be outside a conventional lenders comfort zone. Or there can be issues in receiving the proper permits from the local government. All these property challenges mentioned, and others that were not, can be factors a hard money lender could get comfortable with if there are other compensating factors that can make issuing the loan attractive.