Hard money loans are easier to get than traditional bank loans. There is no arguing that. The way hard money is structured eliminates many of the roadblocks that get in the way of traditional financing. Yet not everything with hard money is easy. In fact, there are two big things to be cognizant of. They should be considered whenever applying for a hard money loan.
Here they are:
- Hard money loan-to-value (LTV) ratios
- Short hard money terms
Actium Partners is a hard money lender based in Salt Lake City, Utah. They make loans in their home state as well as Colorado and Idaho. They explain that Neither of these two things would be enough to negatively impact a hard money loan as long as the borrower made sure everything was in order. But this suggests that the borrower carefully consider both before moving forward.
Hard Money LTVs
Hard money lenders make use of LTVs – just like traditional lenders. LTVs protect both lenders and borrowers. They protect lenders against excessive risk while ensuring borrowers do not take on too much debt. Both parties win.
The most important thing to know for borrowers is that hard money LTVs tend to be much lower than traditional LTVs. How much lower depends on the lender. But an LTV as low as 50% is not unheard of.
What It Means
If you are not sure what this means, consider the relationship between LTV and the borrower’s down payment. If a hard money lender is only going to offer 50% of the total sale price, the borrower needs to come up with the remaining 50%. But that’s not all. Most hard money lenders will require a borrower to have a minimum amount of cash and/or equity in reserve to demonstrate the ability to actually repay.
Short Hard Money Terms
The second consideration is the duration of a hard money loan. This is known as the term. Traditional banks have no trouble lending for 15-30 years. Even their short-term loans have terms of 5-10 years. You would be hard pressed to get those kinds of terms from a hard money lender.
Lenders in the hard money industry prefer to keep terms at 24 months or less. On rare occasions a lender might be convinced to go as high as 36 months. But that is definitely not the norm. It is far more likely that a lender would insist on 6-12 months.
What It Means
All borrowers need to deal with terms. So why are the shorter terms such a big deal in hard money? Because lenders do everything they can to minimize risk. In order to make sure a loan will be paid on time lenders typically ask to see an exit strategy.
What is an exit strategy? It is the borrower’s plan for making final payment on the due date. An exit strategy can be anything a lender and borrower agree to. But more often than not, lenders require something reliable. Examples include future traditional financing or proceeds from the sale of another property.
All Your Ducks in a Row
Perhaps the title of this post caught your attention because you’ve been thinking about applying for a hard money loan. Rest assured that hard money is a great resource if you know how to use it correctly.
To that end, make sure all your ducks are in a row when you apply. Provided you have enough asset value, the money to make a down payment, and a solid exit plan your lender can trust, you should be a shoe-in.
