First of all, what is residential hard money? Residential hard money loan is a type of loan that allows a borrower to get funds based on the value of his residential property. The term is coined “hard money” because it refers to the difficulties of the circumstances in securing a loan. These loans offer high interest rates and low loan-to-value (LTV) ratios because there are no government bodies that back up the lender. Loans are given against the value of real estate collateral.
As mentioned, residential loans are given by private lenders based on the value of the borrower’s asset and not dependent on traditional banking criteria like income statements, credit scores, tax returns and the like. These type of loans may also be referred to as “temporary bridge loans” that provide for acquisitions, foreclosures, refinancing and individuals who file for bankruptcy. They come with higher interest rates as compared to banks but are still said to be relatively cheaper than filing for bankruptcy or taking on a financial partner.
More often than not, residential hard money loans offer interest rates and points that are 50-100% higher than traditional bank loans leading to an impression that such loans are difficult to repay. Nevertheless, hard money loans are said to be beneficial to people who are looking for financial sources in the soonest possible time but cannot secure one because of difficult financial situations.
So what do lenders look for in a property? Most investors highly consider income-producing properties. These include shopping centers, apartments, office buildings, motels, hotels, medical institutions and restaurants. Lenders also offer loans for non-income producing activities like bank workouts, land acquisition, development and construction, bankruptcies, and foreclosures.
Generally, property investors look for secure and safe investments that offer a better return than what they will receive from the bank. Most residential hard money loans are secured by a property with around 30%-50% equity. In this case, he protects himself and receives the benefit of higher interest rate returns.