What is a “Hard Money Loan”

[Don Konipol]

What is a “Hard” Money Loan?

There is apparently, a lot of misunderstanding as to what is meant by “hard money”. Amongst the common misconceptions I see by posters on BP are that hard money loans are junior mortgages to fill the gap between institutional financing and down payment; that it is in lieu of down payment so the borrower can acquire a property with “no money down”, and that it is money borrowed to use for an earnest money deposit. So to clarify the how, why and what of hard money loans, I have outlined a very simplified explanation of where we as a hard money (commercial real estate ) lender come in

1. Owner of real property needs a loan, but does not qualify under institutional financing criteria

2. Loan is brought to us to consider funding and we determine that risk/return parameters are acceptable

3. We make loan at a total cost to borrower of about double what “A or B” risk borrowers would pay for  bank financing

Loans are 1st liens, short term (12 - 24 months) at no higher than 65% loan to value.

Hope this adds clarity 

[Sean Macneir]

@Don Konipol yeah I've seen the misconception too. Mistaking gap lenders for HMLs. We don't fill the gap haha we create the "gap" aka normal money to close. The money people put down is equity, and it has protections in it for both the borrower and the lender but people really want to get in at no cost recently with FICO that could use some help. Anyways, even if a gap lender comes in, if it's even an allowable second position (A lot of lenders won't do that and Silent 2nds are a No-No) they add so much additional risk to the deal, potential legal ramifications and all around generally dangerous feet's. I've heard of their full recourse scenarios consisting of personal assets and even garnishing wages(I suppose it's contract dependent and how sharky they'd guys get). I haven't dealt with one on any of my deals while in my time lending but on the residential side gap funding comes up on a weekly basis. Even if the EMD is covered people use these loans, should consider what other costs there are and potential ramification. We just had a 100+ portfolio fall apart because of silent seconds upon refi to achieve a bail out. Depending on the endeavor, your still have potential origination, closing cost, reserves of different size(deal type dependent) and other applicable fees/costs. If that lender wasn't able to provide you with the necessary funds and isn't willing to add in a gap to the gap I just picture disaster.