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How to Get a Hard Money Loan

What it is

A hard money loan is a type of financing in which a borrower receives funds based upon the value of a specific parcel of commercial real estate. These are typically issued at higher interest rates compared to conventional commercial or residential property loans. These are almost never issued by a commercial bank. Hard money lenders structure loans based on a percentage of the quick-sale value of the commercial property. The loan-to-value ratio is usually around 60 to 70 percent. The interest rate on a hard money loan varies, but is typically between 25 and 29 percent.

Most lenders only lend in the first lien position, meaning that they are the first to receive repayment in the event of default; although some lenders will subordinate to a second lien position loan. Hard money loans are very high risk and have a higher than average default rate since those seeking them are often in poor or emergency financial situations. In the case of a default, the property is sold to pay off the lien.

Who it's for

Hard money loans are for people who need funding as a last resort. These loans are used almost exclusively in the United States and Canada. In commercial real estate, the hard money loan developed as a last resort for property owners who needed capital immediately; the industry operates with particular speed and responsiveness. It originated in 1950s with very high loan-to-value ratios and continues today with much lower loan-to-value ratios.

What you need to do to apply

To apply for a hard money loan, you will need documentation and appraisal of a piece of commercial property, as well as a credit rating check and a meeting with a hard money lender. All hard money borrowers are advised to use a professional real estate attorney to assure the property is not given away because of a late payment or other default without benefit of traditional procedures and court judgments.

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