What is a hard money loan?

On Behalf of | Sep 19, 2023 | Business Law, Real Estate Law

Commercial real estate deals often involve “hard money loans”.  In this case, the private lender offers fast cash financing at a higher interest rate and lower loan to value ratio than an institutional lender.

Rather than a mortgage company, credit union or bank, the lender is a private business entity that accepts assets or property as collateral for the hard money loan. The lender is less worried about the borrower’s credit rating or the risks of non-payment because they believe the collateral is sufficient to cover the loan and collection costs if the borrower defaults.

How it works

Hard money loans are often used for commercial or investment properties. Borrowers may turn to this option if their regular bank or lender denies the loan or creates too many hurdles before approving it. Some business opportunities can’t wait for the laborious approval process of traditional loans.

There is more risk for the lender, which means higher loan rates. Also, the repayment is usually due in a very short time – often less than a year, as opposed to a longer term conventional commercial loan.

Why use one?

There are various reasons why borrowers consider this type of loan. Banks are conservative by nature or may not see the merit of a unique property as an investment opportunity. Hard money short-term loans also work for businesses flipping properties since the borrower has no intention of holding onto the property they intend to purchase.

Lenders may need to foreclose

Hard money lenders are typically private investors who do not need to follow the same credit approval rules as traditional lenders. Still, hard money loans are secured loans, which enable the lender to take possession of the collateral to recoup the money lent to the borrower. Because of the risk, it is important that the loan documents contain every possible protection for the lender.

Lenders in eastern Pennsylvania interested in making or collecting a hard money loan debt can contact Max L. Lieberman & Associates, P.C. at 610-936-6612.