Are you considering taking a hard money loan? The funds you’ll receive depend on your real estate value. Expect to pay a higher interest rate than a conventional loan issued by any commercial institutions.
Hard money loans and bridge loans coincide in several ways. The only exception is that a bridge loan involves a property in transition that doesn’t qualify for a conventional loan. Hard money loan is an asset-based loan often used in a distressing situation like bankruptcy, foreclosure, or mortgage arrears.
What is the Basis of Hard Money Loan Structure?
Most hard money lenders only accept first lien position when giving out the cash. So in case you default, they are the first to benefit from the liquidation of the property used as collateral. If a lender surrenders the first lien position, they give out what is called second lien or mezzanine loan.
The structure of hard money also depends on the percentage value from the sale proceedings of your property. This is known as the LTV (loan to value ratio). It basically ranges from 60% to 70% of your property’s market value.
The value, in this case, is the purchase price. That is the amount a lender expects from a property sale if you default the loan. It must be sold in a time-frame of 1-4 months. No wonder hard money loans without collateral are very rare.
Keep in mind this is not the appraisal value. A market value appraisal entails an arms-length transaction whereby neither the buyer nor the seller is under duress.
Hard Money Loan Monthly Payments
Lenders basically set flexible payment schedules for the borrowers. During the loan term, you might be only required to pay the interest; which begs the question: Are hard money loans interest only?
Hard money loans are indeed interest-only and they provide a lot of flexibility. Your lender understands your tight financial position and so they can delay the payment on the principal amount. This makes things easier for you throughout the debt’s lifespan.
However, you are likely to face a balloon payment as the loan term comes to an end. In fact, most hard money loans are balloon loans. Your principal amount will be due towards the end.
That is why you must get ready to repay the loan balance all at once. You can achieve this in a number of ways:
- Refinancing
- Selling the property securing the loan
- Saving up and settling the debt
Cross-Collateralization
Suppose your LTV isn’t sufficient to pay off a hard money mortgage lender in the first lien position. There’s an alternative for equity below the minimum LTV. This is where cross-collateralization comes in. Some hard money programs allow cross lien on another property of the borrower.
This is also known as a blanket mortgage. It applies when you have additional real estate investments and the collateral for one loan is used for a second loan as well.
Being late on a payment can make you pay a stiff penalty. You also must be careful when making a prepayment on your hard money loan. Find out first from the lender if prepayment is penalized. A good rule of thumb is to understand the terms and conditions beforehand.
