Hard money Loans for Complex Loan Scenarios
What do you do when your borrower is declined for a commercial mortgage loan at a bank? As a real estate broker, you are bound to face this scenario from time to time. Knowing your options will allow you to pivot to plan B and save the deal.
In many scenarios, a hard money loan may be your only option. With factors like poor credit, seasoning issues and little or no income, hard money can prove useful in your arsenal. Commercial brokers should learn about hard money loans so that they may identify the proper application of one.
When Should You Consider Hard Money Loans a Good Idea
What is a hard money loan?
A hard money loan is a real estate-backed loan where a borrower receives funds secured by the equity in their property (or properties). The word “hard” means an asset. Hard money lenders like TGP Funding are mainly focused on the equity in the property as opposed to the borrower’s financials or credit score. Hard money loans are typically short-term ranging from six months up to two years.
Borrowers requiring a hard money loan often have experienced a distressed financial situation, such as a bankruptcy or foreclosure, which has damaged their credit. Interest rates are usually at least 8 percent and can often be much higher because lenders are taking on more risk with a hard money borrower’s situation.
Hard money loans aren’t cheap, but they do fill a void in the small-balance commercial mortgage market. So, it’s important to be able to recognize a borrower who will only qualify for this type of deal and to select the right hard money lender.
When A Hard Money Loan Works
The Borrower’ s Credit Score is Low
If your borrower’s credit score is subpar, a hard money loan might be the only option. Hard money lenders are typically most interested in the equity and the location of the property, contrary to the borrower’s financial situation. With that being said, the creditworthiness of the borrower is still somewhat of a factor. Most hard money lenders will pull credit before funding the loan. It is better to be upfront about the low credit score when submitting your loan application. The score will come up eventually anyway and this will help speed up the loan review and establish more trust with the hard money lender.
What to look for
If you have a loan scenario in a metropolitan or coastal area, and there is substantial equity, you may have a good scenario for a hard money loan. Regardless of the subpar credit score of your borrower, a good hard money lender will see the potential in the deal. If the borrower has other properties they are willing to use as cross collateral, well that’s the icing on the cake. This provides a much stronger loan scenario and you have a better chance of getting a term sheet for your client.
Borrowers With No or Little Income
Similar to the first scenario, the lender will not be so concerned with the lack of income from your borrower. As long as you have enough equity in the deal and the property is in a good location, you are still in good shape.
What to look for
Borrowers who are no longer in the workforce and looking for financing options may have no other choice than to use a hard money loan or bridge loan. A traditional bank may overlook them for a loan, while hard money lenders work with this scenario every day. Your borrower must have a significant down payment for the purchase or other properties to use as collateral to make this deal appealing to the hard money lender.
“Cash-out refinances for retired borrowers is a loan scenario we see often. Income is only one piece of the puzzle when considering a loan.” said Leonard Bruno, Business Development for TGP Funding.
Seasoning issues (owned the property less than 2 years)
Seasoning issues also can keep a borrower from qualifying for a mortgage from a bank or some private lenders. Generally speaking, if your borrower has owned a commercial property for less than two years, the individual will run into issues with seasoning. In this case, a hard money loan could be the right solution as these types of lenders usually don’t have seasoning requirements.
Borrowers who need a bridge loan and are planning to sell their property to pay it off also are potential candidates for hard money financing. Bank loans and some private-money mortgages are usually longer-term loans with prepayment penalties, so a hard money loan that can be paid off quickly without incurring additional fees is your borrower’s best bet in this situation.
The Property Will Be Used For Cannabis
The Cannabis industry has sprouted up across America. Chances are you have already come across loan requests for commercial buildings and retail properties for Cannabis-related businesses. Although traditional banks will not touch these loan scenarios, they may be a good scenario for a San Diego hard money lender.
What to look for
For starters, the borrower must come in with a substantial down payment to acquire the property. This is usually not a problem given the nature of the business. The issue many commercial brokers run into is the valuation of the property. When looking at sales comps, it is important to look at non-cannabis sales. Many cannabis companies are often overpaying for buildings causing an overinflated value. Most hard money lenders will look at sales comps from properties in the area not involved in cannabis.
Another question to ask your borrower is have they been granted a cannabis license or conditional-use permit? Knowing if they have the permit to do business in the Cannabis industry in the building. The best scenario for the lender is if the Cannabis License is attached to the building so that in the event of a foreclosure, the license would stay with the property and be transferred to the new owner.
Pursuing A Hard Money Loan
A benefit to working with a private money lender is speed. A good one will get you a loan decision within 24 – 48 hours of receiving a file and sometimes within just a couple of hours. The key to moving your loan along quickly is submitting a concise file. Unlike traditional banks, hard money lenders are not looking for a large file on the initial submission. A completed loan application along with a summary is a good place to start.
If you are working with a borrower with a credit score that is too low for traditional financing, you should consider the hard money option to buy more time. Whether they are looking to bridge the gap to long term financing or looking for a quick exit strategy, a hard money loan should be an option your discuss with your clients.
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