understanding hard money lending

[Zac Davis]

im trying to understand how hard money lending works. at first i though if you find a lender and he wants 10% you would pay him his money and 10% when you reach the 3 month or 6 month term you set up. But If I'm paying 10% apr then it is $10,000 for a year use of the money. if it is just the time used then it is $833 per month( 10,000/ 12 mns.) unless of course it is compounded monthly, then the amount would be a little more each subsequent month. can anyone explain how a typical hard money loan works? i know its different for every lender but just a basic understanding of how they typically work would be great.

[Rick H.]

I've been a hard money lender since 1989.

Before consumer laws were passed to eliminate the consumer owner occupied market for lenders, hard money competed with sub-prime lenders and brokers who offered a longer term product with start rates that appealed to the borrower.

The basic concept of hard money loans today is flexibility of terms in return for higher yields and greater security for the private note investor (in theory, anyway). 

Borrowers can lie about the income, explain away derogatory credit, but hard money is intended to be collateral driven. Essentially, the lender must be prepared and willing to own the asset at the investment-to-value ratio (net LTV).

We used to make loans up to 65% LTV but many years ago discovered that this did not sufficiently protect the investor when the market went in the crapper. We also eliminated lending to rehabbers as they were problematic and tried to be clever when in default. That's why I do not promote loans here on BP.

Most borrowers can expect an interest rate for a 1st mortgage around 12% in today's HML market, with a couple points, monthly interest-only payments and a 6-24 month balloon payment.

Anything else is a lender just trying to make a deal and get their money to work.