Hard money loans are a specific type of asset based lending through which a borrower receives funds secured by the value of a parcel of real estate. From inception, the hard money field has always been formally unregulated by state or federal laws, although some restrictions on interest rates (usury laws) by state governments restrict the rates of hard money such that operations in several states.
Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk taken by the lender. Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers.
Hard money loans are typically issued by private investors or funding companies.
Whereas a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, a hard money loan often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.
The qualifying criteria for hard money loans varies widely by lender and loan purpose. Credit scores, income and other conventional lending criteria may be analyzed. However, most hard money lenders primarily qualify such venture capital based on the value of the real estate being collateralized.
Typically, the biggest loan one can expect would be between 65% and 70% of the property value. That is, if the property is worth $100,000, the lender would advance $65,000 – $70,000 against it. This low LTV (loan to value) provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property.
Such loans are loans of last resort or a short-term bridge loan. They are backed by the value of the property, not by the credit worthiness of the borrower. Since the property itself is used as the only protection against default by the borrower, these loans have lower loan-to-value (LTV) ratios than traditional loans.
Hard money is a term often used to describe a funding stream originating from a government agency or other organization that represents an ongoing and scheduled series of payments, rather than a one-time grant. Hard money could take the form of government daycare subsidies or annual scholarships to post-secondary students.
Hard money is also used to describe a physical currency, such as coins made out of precious metals including gold, silver or platinum or circulating currency whose value is directly tied to the value of a specific commodity For instance, the Gold Standard once used by the United States could be called hard money.
Hard money is a preferred form of funding by governments and organizations because it provides a predictable stream of funds. In the case of a student scholarship, it provides budget certainty to the student planning for his or her time in college. By comparison, one-off grants can make long-term planning and budgeting more challenging.
Hard money as it describes the nature of currency is less common in today’s global economy. Most countries use fiat money, which is made legal tender by government decree but has no intrinsic value of its own. While hard money has a value tied to the value of its underlying commodity, the value of fiat money is tied to supply and demand factors. Using fiat money can give governments greater flexibility in the event of a financial crisis.
Hard money is also a term used in politics and in lending.
- In politics, the term hard money means money donated directly to a politician or a political action committee. Hard money contributions carry a number of limitations and regulations, including how much you can contribute and how it is used. By comparison, contributions to political parties that don’t have the same limits and controls are often called soft money contributions. So while an individual can donate up to $2,700 in hard money per election to a specific candidate (in 2018), he or she could donate an unlimited amount to a political party, which can then be redirected to various candidates.
- In lending, a hard money loan is one that is backed by the value of a physical asset, such as a car or home. The value of the asset acts as collateral for a loan that typically offers a higher interest rate than what the borrower might receive through a traditional mortgage lender or other established financing channel. A hard money loan is most often issued by private investors or individuals as lenders of last resort due to timing or perhaps the distressed financial situation of the borrower.
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