Typical loan documents required for a hard money loan include a Note and a Deed of Trust; other documentation requirements do vary but may include a personal guarantee from borrower (sometimes non-recourse loans are issued without a personal guarantee); personal financial statements such as past tax returns and proof of income; and assurance that the borrower has access to sufficient cash to perform any and all proposed property renovations.

The purpose of a Letter of Intent (LOI) for a hard money loan is to provide a quick means to be sure that both the prospective borrower and lender are on the same page. Although this document is not legally binding on either party, it serves to put the prospective deal “in writing” and helps to avoid any miscommunication or misunderstandings.

Title insurance helps protect someone who has purchased real estate against another party making a claim challenging the ownership of the property and the seller’s right to enter into a transaction. Well known title insurance companies include Fidelity National, First American Title, and Chicago Title. The title insurance company will handle any issues that arise during the property sale, and if a competing claim of ownership is deemed legitimate, the title insurance company is responsible for payment of any fees to the claimant. The reason why hard money lenders insist on being covered under title insurance is to enjoy the same protection as the borrower.

A Mechanics Lien is used in the construction trade when a property owner either fails to pay a general contractor for services rendered, or the general contractor fails to pay sub-contractors according to the terms of their agreements. Since title insurance does not provide any protection against this, hard money lenders will protect against possible Mechanics Liens by making sure that if a loan includes a renovation budget, that all sub-contractor and general contractor releases are properly executed before disbursing funds to a borrower.

Hard money lenders typically will charge interest rates in the high single digits to low double digits, with a range of 7.5 percent to 16 percent being considered standard.

Additionally, origination fees can range from 1-4 points, with any additional points above this range usually signaling that there are numerous brokers involved in the transaction.

It should be noted that points paid on a longer-term loan may be beneficial if the borrower needs capital for a longer period of time, as it is not uncommon for many hard money lenders to include pre-payment penalties which guarantee the lender a minimum number of months of interest on the loan principal. Borrowers should also be aware that extension options are possible on hard money loans and are a matter of negotiation with a lender.

Whether or not hard money lenders / bridge financing lenders require non-refundable deposits varies from one lender to another. This often depends on the following criteria:

• Willingness to risk the borrower changing their mind
• Due Diligence required
• 3rd Party reports
• Appraisals

A deposit, when charged, can vary from $1,000 to tens of thousands of dollars in total depending on the deal and deal structure. Deposits are usually not required for hard money loans on single family homes.

Prospective borrowers for a hard money loan should think carefully before paying a deposit to a lender; if a loan is for a single family home renovation there should not be a deposit charged.

However, for larger, more complex transactions with a lot of underwriting requirements, payment of a deposit is more warranted.

Hard money lenders make loans everyday and close on hundreds of loans per year.

Some lenders may require that a hard money loan be personally guaranteed by the borrower, although there are instances where lenders are willing to offer no-recourse loans based on the borrower’s history and the appeal of the specific opportunity.

The typical term for a hard money loan is 6 months to 3 years. Loans requiring greater than a 3-year maturity are usually outside the scope of this form of financing. Single family home renovations would tend to be 6-12 months in duration, while a commercial shopping center renovation term would likely be 2-3 years. Hard money loans often require a personal guarantee and require first positioning as the lender of record, although some lenders are willing to make subordinate junior loans where another lender holds the primary mortgage

The fees usually associated with a hard money loan will include origination fees of 1-6 points, possibly a deposit fee, plus an underwriting fee to ensure the loan conforms to necessary lender requirements. In some instances a foreclosure deposit may be required. Borrowers should be wary of individuals or entities trying to make money from the deposit fee with the hope of getting a loan done “after the fact” due to a lack of available capital.

A borrower who defaults on a hard money loan ultimately is subject to having the lender foreclose on the property which has been put up for collateral. It should be noted that lenders typically follow a sequence of steps in order to try to avoid this final recourse. Such steps may include the lender attempting to reach the borrower to find out the current status and disposition of the property in order to see if things can be worked out cordially; the penultimate step is to file a Notice of Default if necessary to trigger the legal foreclosure process.

Hard money lenders utilize two different measures to evaluate deals: loan-to-cost (LTC) and loan-to-value (LTV) metrics. While risk tolerance is highly dependent upon the lender, most prudent private money lenders will not exceed a loan-to-cost ratio of 75 percent, while the loan-to-value ratio is usually kept in the 60 to 65 percent range to ensure a sufficient safety margin. Lenders may use the lesser of the LTC or LTV values to assess a loan, depending on when the property was purchased; in the instance of more recent purchases, lenders will look at what the borrower paid for the property.

Hard money lenders have different requirements for the due diligence process, but generally speaking, origination of commercial loans will require the most comprehensive list. Residential loans may require an appraisal from an outside party; a property inspection report; a geology inspection (particularly based on the locale of the structure); and the borrower’s financial records. An in-person inspection of the property is nearly always part of the decision-making process, which is why hard money lenders tend to have a localized focus.

Owner occupied hard money loans are different from other types, due to state laws requiring extensive documentation intended to protect the borrower from predatory lenders. Many hard money lenders are not set up for compliance in this regard and therefore will not make loans for owner-occupied residential properties.

It is possible for borrowers to secure a hard money loan even if another loan is in place, although this will require either the borrower getting a new hard money mortgage to replace the existing first mortgage or qualifying for a subordinate junior loan which leaves the first mortgage in place.

While seeking a hard money loan is a personal decision which will vary depending on the individual, situations where hard money loans are generally a good recourse are when the borrower is anticipating a large profit from a real estate transaction or realizing large savings in a short amount of time.

A borrower can negotiate the best rate for a hard money loan by having multiple lenders willing to compete for the business. This in turn means that the prospective borrower needs to be well-organized and have all necessary documentation ready for inspection; ideally having a strong credit history; and impressing upon prospective lenders that the proposed project meets their needs and risk profile.

Borrowers that secure a hard money / private money loan face the following risks: Risk of lost time if a lender does not perform; Risk of lost deposit if a deposit is required, and the lender does not ultimately make the loan; Market risk and execution risk on the underlying project; Risk of associating with a less than reputable lender; Risk that the lender fails to come up with the loan amount in a timely manner, possibly endangering a deal (for example, if money is not placed into escrow by a pre-determined deadline).