A commercial or residential property hard money loan is also known as a bridge loan in commercial investing — it bridges you from a temporary situation to a more permanent situation. The goal is to be bridged from a hard money situation to a more conventional situation where you’re going to go from a very expensive interest rate payment per month to something much lower like a traditional bank loan/commercial mortgage or you plan to sell/flip the property fairly quickly.
The Five Major Differences Between a Commercial Hard Money Lender and a Conventional Lender
1 — Interest Rates
A conventional loan’s interest rates are lower than a hard money loan. In fact, hard money loan interest rates can be up to three times higher than a convention loan.
2 — Upfront Costs
In a conventional loan, your upfront costs can be as low as 1% of the loan amount. On the other hand, a hard money loan will charge 2-5% just to use their money.
3 — Loan Terms
A conventional loan term can be as little as five years or all the way up to 30 years. A hard money loan term is typically between 6-12 months.
4 — Borrower’s Credit
Your credit is very important to a traditional lender. Hard money lenders may check for major flaws, but because the loan is based on the equity of the property or terms of deal, you can have flaws in your credit and still qualify for a hard money loan.
5 — Closing Time
Closing time is the amount of time it takes to close a deal. A conventional loan is more time consuming because they have to underwrite the deal, order inspections, go through their legal department, get a “yes” from their loan committee, and put together their closing paperwork. This can take 30-60 days.
Hard money loans can close in as little as 7 days because the hard money company is usually owned by one or two rich individuals who are lending out their own money.
The Three Most Common Commercial Hard Money Questions
1. Does My Credit Matter?
The answer is maybe. When a hard money lender goes through the process of qualifying the deal and you, they look at the deal in three ways. They look at the property, they look at the area and then they look at you, so you’re third on the totem pole. However when looking at you, if you have bankruptcies or foreclosures, you may have some explaining to do.
2. Do I Need to Put Money Down?
The answer is yes because there is no 100% financing for hard money loans. You will have to put between 20-40% down depending on your commercial hard money deal. This is the down payment plus the closing cost, which can be up to 5% or 6% of the loan.
The great thing about hard money lenders is that they are open to creative deals. I recently had a student purchase a 90-unit apartment for 3 million dollars with 10% down. The hard money lender required a 30% down payment so the student negotiated with the seller to carry the other 20% for three years as a second mortgage. The hard money lender was open to this deal because, their 30% down requirement was satisfied.
3. What’s the Secret to Getting My Loan Approved?
You need to have a realistic investing exit strategy that everyone involved in the deal agrees with. Everyone involved would be yourself, your lender, the person you’re borrowing your money from, your property manager, and your mentor if you have one. Having everyone agree on an exit strategy will put you in the best position to get your loan approved and your deal closed.