Introducing Hard Money Financing

by Aazdak Alisimo - Date: 2007-09-06 - Word Count: 482 Share This!

Hard money financing is very often the port of last resort. It is a loan that is secured by a piece of property that is valued at its quick sale value.

Hard money financing is a specific type of financing that is most often made to the owner of a piece of property and is in some kind of financially difficulty. The reason this is true is that generally the loans are much more costly than conventional loans and the method of valuation used on the property that will serve as collateral for the loan is geared to the quick sale value of the property. This quick sale value is called a loan to value ratio, or LTV ratio, and it is usually going to be only about 60% of the actual value of the property.

The idea behind the LTV ratio is that, in the case of default, the property can be sold and the loan value recovered very quickly by offering the property for sale at greatly reduced price. This is what usually happens with a defaulted loan anyway, but with a normal loan the lending institution is going to take a loss on the quick sale. With hard money financing, the LTV ratio protects the lending institution from this loss to some degree.

This is why hard money financing is considered a last resort option. It is usually made to borrowers who are experiencing some type of financially difficulty such as an impending foreclosure anyway. To be brutally honest, these are loans that a borrower would laugh at given there terms. The fact the borrower is in such bad shape makes them seem viable.

Hard money financing is similar in concept to the Bridge Loan. A Bridge Loan is made on a property that is in a state of transition. This might be a property under construction and the construction costs have exceeded the original budget and cost projections. Now, additional funds are needed to complete the project to avoid a total loss. The Bridge loan will also have a generally higher rate and be based on a lower LTV ratio. This is logical since the risks would appear to be greater due to the fact that the project is in a "bridge" condition in the first place.

This is the key to understanding hard money financing. Lending institutions want to make loans. Lending money is their source of income and the purpose of their business. Many loan applicants come away from a loan approval process thinking just the opposite is true. It is all about risk management. If the risks are higher, the interest rates must be higher. If the risks are too great, the loan cannot be made. The Hard Money loan fills the niche where the risks appear to be higher, but not so much so as to not be worth taking.

Aazdak Alisimo writes about hard money commercial loans for

Related Tags: money, loan, interest, resort, ltv, fees, fiance, rates, last, hard, bridge, desperate

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