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Sean McGrover

How Hard Money Loans Work

Monday, March 18, 2013 - Article by: Sean McGrover - McGrover Commercial Capital - Message

Are you looking for a hard money loan or bridge loan? There are hard money loans available for residential and commercial real estate use nationwide. Hard money loans are typically used by individuals and companies that are seeking capital for short term needs and or for difficult situations. Whether you are buying out a partner, paying off an IRS lien, going through a divorce, consolidating debt, dealing with family issues, such as weddings, death, college funds, etc, hard money loans can be an option to help in reorganizing a difficult or unexpected situation. Hard money loans are also great for real estate investors that need quick cash to acquire real estate opportunities and to negotiated better terms with sellers of residential and commercial real estate.

Basically hard money loans are high interest rate loans which are always secured with residential and or commercial real estate. These loans can typically be funded in as little as 5-10 business days, but sometimes can take as long as 30 days to fund. Most hard money loans have set rates, terms and fees.

When deciding on borrowing hard money, it is imperative that you have an exit strategy in place, primarily because these loans are usually short term loans that range from 12 months to 60 months. Additionally private lenders are not interested in participating in long term financing. Private lenders are seeking higher returns for their risk and feel comfortable with lending their capital due to the fact that their capital will be secured with real estate in case of default.

Rates on hard money loans typically start around 9% in today's market and can sometimes be as high as 15% depending on the underlying risk that the private lender feels is imbedded in the transaction.

Fees associated with borrowing hard money are broker points, title work, comparative market analysis or appraisals and legal fees to name a few. Before any loan commitment, the borrower will receive a term sheet with all costs and or fees associated with the funding of the loan.

Terms on Hard money loans, as we mentioned briefly above, can range from as little as 12 months to as much as 60 months, but most private lenders and even the borrowers, try to average their loans for around 24-36 months maximum.

Prepaid penalty is another item that should be considered when borrowing hard money. Many times our private lenders will lend their capital to borrowers and do not wish to have their money returned too early, so to offset this potential return of capital, some of our private lenders will place a prepaid penalty on the loan if the funds are returned before a minimum of 12 months. This is not always the case and sometimes it is important to see about negotiating with the private lender to forgo a prepayment penalty prior to the loan being funded. Prepayment penalties can be as low as 1% of the loan amount to as high as 8% of the loan amount.

Why do our private individuals and companies lend hard money? Basically, private lenders such as high net worth individuals and companies lend their capital because they are seeking higher than average returns which they typically cannot find in other investments. These private investors always have their capital secured unlike when investing in a business or the stock market and the private lenders will only invest up to an average of 65% of the asset that is being used as collateral. Sometimes, however, our private lenders will limit their exposure and will only lend a total of 50%, but rarely does this happen, however it is something that is considered prior to loans being disbursed. This strategy of limiting the loan to value of the asset being used as collateral makes our private lenders more comfortable and more willing to lend.

If you are in need of capital for any real estate transaction and cannot seem to qualify under traditional financing guidelines, but are looking to purchase or refinance residential or commercial real estate, then maybe we can help you. To get started either email me at or call me at to 407-765-0341

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