Privately funded, hard money commercial mortgage loans require much less documentation than conventional, institutionally funded mortgages, and they are generally equity based and not dependent on the borrowers credit score. Decisions are made very quickly and private loans can close in less than half the time it takes to close a bank loan. For many commercial real estate investors and developers, hard money is a useful and dependable source of funds.
Private commercial mortgage lending is a straight-forward, no-nonsense business; if you meet the requirements you're likely to get funded quickly.
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Cash in the deal
The era of 100% financing is over. Private lenders may not have strict down-payment rules but, virtually all will ask that a borrower have skin-in-the-game. The borrower's cash contribution does not, necessarily, have to come in the form of a check at the closing. The investor or builder will get credit for all money they've but into a building or tract of land. Money spent on hard costs, such as actual site work and soft costs such as engineering and architectural plans can and will be credited to the borrower as "hard equity" just like a large down payment would be. As a general rule private mortgage lenders will stay away from any project where the principal is not willing or able to bring 10% cash or hard equity to the deal.
Equity
Hard money loans are essentially equity loans. It is mandatory that any commercial real estate attempting to be financed through a private lender have substantial equity in it. Loan-to-value ratios (LTV) in the hard money sector are much lower than in conventional.
Do not expect to be approved for a loan of any more than 50% of the value of raw land, 60% on fully entitled land, or 65% on buildings. However, keep in mind that most private lenders will allow a good sized seller carry back or other 2nd position mortgage, as-long-as the total amount financed does not exceed 90% of the value of the collateral.
Credibility
Private, hard money loans are not credit driven, but that does not mean private lenders won't check your credit report; they will. Like it or not your credit report speaks to lenders about your character and credibility. No matter how sweet a deal looks from an equity standpoint, few lenders will risk their capital on obvious deadbeat borrowers.
You do not have to have perfect credit, you don't even need good credit, you can even get a hard money loan with poor credit, but you can't have ugly credit.
Experience
Any builder or property owner with a track record of success will stand a better chance of getting funded than will a fist time investor or first time developer. Private lenders are savvy professionals and like to work with other professionals. If you are new to commercial real estate, my advice is to bring a seasoned professional in on the deal. You may have to give up some profit, but the deal is much more likely to go through. Once you have your name associated with a successful project or profitable building, getting mortgages will be a-lot easier.
With These Factors in Place, You Will be Approved
These are the main things private lenders are concerned with when they consider a hard money loan. If a borrower is of good character, has some experience (or has a partner with experience), and can show both hard (cash) and soft equity in a deal, chances are very good that they'll easily qualify for a privately funded commercial mortgage loan.
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