At Apartment Loan Store, we have five bridge or hard money loans to choose from in your area. In fact we call some of our hard money loan programs soft money loans, or medium hard money financing. Our hard money rates start at 6.50% and go up to 12.0%.
You may be wondering what is a hard money commercial bridge loan? How are hard money bridge loans different from traditional or conventional loans? First, it is important to know that a hard money loan often has the same meaning as a bridge loan. Both loans are expensive temporary loans that bridge the gap of time needed to get your project to permanent financing or a sale. A commercial community bank loan will take an average of 60 days to close, whereas a hard money loan can close in as little as a week. If you need a hard money commercial loan it often means that your financial situation or the condition of the property is non-bankable. These are no-doc or low doc private loans. Banks require good credit, tax returns, multiple source of income, a net worth to loan ratio and a liquidity (cash) to loan ratio. Hard money loans do not require all that.
When you do not meet the requirements for conventional financing because your credit score is too low (below 680), you don’t show much income on tax returns, or you simply do not have the net worth requirements that banks and “A” paper commercial loans require, a hard money might be the only place to turn to. At Apartment Loan Store, we have made hard money loans with credit scores as low as 450. Also, as mentioned, a hard money bridge loan can give you the time needed to meet the requirements to qualify for permanent financing – time to improve your credit, improve your income and net worth.
When it comes to hard money loans, the underwriting is focused mostly on the real-estate and much less on the borrower’s finances or credit. Experience may still be necessary. Hard money and Bridge lenders especially like to lend on commercial properties that have an up-side called value added projects. This means that the borrower will be getting the property for a great price today and improving it over time by remodeling it, increasing the rents or both and thus greatly increasing the value when the project is finished.
A key difference between hard money loans and traditional loans is that hard money loans often require a higher down payment or more equity. This is because there is higher risk. The loan to value for multifamily bridge loans typically ranges from around 60% to 70%. At Apartment Loan Store we have bridge loan programs that go up to 75% of the completed estimated appraised value on value added projects and 75% loan to value on properties not needing many improvements.
One of the main reasons a borrower chooses a hard money loan is because they need the money quickly. Hard money loans close in as little as a week and seldom take longer than 30 days. Some hard money lenders do not take the time to do an appraisal. They will do their own valuation based on their knowledge of the market and tax rolls.
Why are hard money interest rates so much higher than conventional bank rates? This is partially because the lender is taking a much greater risk, but also because of supply and demand. There is a huge need for hard money lending and these lenders are able to get these rates. Hard money and bridge loans also have much higher points or loan fees – typically 2% to 6%. On the positive side, hard money loans are usually interest only resulting in lower monthly payments than an amortizing loan at the same rate.
Another difference between a hard money loan and a traditional loan is that the term of a hard money loan is generally quite a bit shorter than the term of a traditional loan. A hard money multifamily loan usually has a term from 12 months to 18 months. Keep in mind that a multifamily permanent “A Paper” loan generally has a term from 5 to 10 years. At Apartment Loan Store some of our bridge loans have terms of up to 3 years.
One key requirement for a hard money loan is to have an exit strategy – so be sure to not qpply for one until you have your strategy figured out and can present it well. An exit strategy means that once you have completed the term of the hard money loan, you can convince the hard money lender that you will qualify for a permanent loan or if you plan on selling the property that it can be done quickly and for premium dollars. For those investors keeping the property long term, at Apartment Loan Store we will put the deal together at the beginning with a dependable strategy for a take-out perm loan to kick in when your hard money loan term is up. Keep in mind that hard money and bridge lenders like to get their money back rather quickly so they can lend it out again.
The greatest risk to hard money/bridge lenders is making loans for value added projects to investors who just do not have the experience. If the rehab cost ends up being a lot more and it takes much more time than anticipated to complete the improvements, the project can implode from a combination of not having enough funds to complete the project and the hard money high interest rates. Here is an example: An inexperienced investor is remodeling an apartment building that he has bought for a great price. He thinks it just needs new floor coverings, new cabinets and new appliances. It turns out that the HVAC system barely works and needs replacement; the buildings are leaking and need new roofs, and the estimate he got on resurfacing the parking lot has doubled. He estimated the total rehab costs to be $60,000, but the actual rehab costs once, he does the additional improvements are $110,000. Unfortunately, it is now taking him 4 months longer to complete than anticipated, which is costing him an additional $24,000 in interest on his loan. He simply does not have enough money to complete the renovations and get the property rented. The developer’s inexperience has now placed him in jeopardy of losing the property.
In What Situations Is a Hard Money Loan Helpful?
1. Borrower has too low of credit scores.
As referred to earlier in this article, low credit scores are a primary reason to get a hard money loan. The borrower’s credit scores are too low to qualify for a permanent loan. Thus the borrower gets a hard money loan giving him time to increase his credit scores to an acceptable amount.
2. Property needs a lot of rehab.
The borrower has located an apartment complex that requires a lot of rehab. This is too much rehab to meet the requirements of a permanent loan. A hard money loan can be just what is needed to meet such requirements. The apartment complex during the period of the hard money loan gets rehabbed to meet permanent loan requirements.
In taking out a hard money loan, we recommend the borrower request an extra 6-month period to be sure to complete the requirements needed before the expiration of the bridge loan. This is because it so often takes more time than expected to complete a bridge loan. For example, an investor gives himself only one year to complete a good size multifamily rehab project. However, during the time of rehab, there is a chronic labor shortage, and it causes a 4 month delay in the rehab. The investor does not complete the bridge loan during the one year period, and experiences extra expenses.
3. Occupancy is low.
High quality commercial permanent loans require 90% occupancy. Some permanent lenders will allow occupancy in the mid to high 80s percentage wise. But banks consider a loan on a property with 80% or lower occupancy, a distressed property – meaning hard money financing could easily be recommended.
4. Property doesn’t have high enough cash flow.
The property doesn’t qualify for permanent financing because the cash flow falls short. Hard money financing can allow the investor to have time to increase occupancy and/or raise rents, resulting in getting the cash flow required for a permanent loan.
5. A multifamily property has a loan that expires soon.
The problem is that the investor does not qualify for bank financing because his credit scores are too low. A hard money loan can give the investor enough time to qualify for refinancing his property by bringing his credit scores up to an acceptable level.
6. Bankruptcies, Foreclosures, Loan Modifications, Judgments and Tax Liens. A borrower wants to purchase a multifamily property, but has a Bankruptcy, Foreclosure, Loan Modification, Judgment, or Tax Lien on his credit report. Let’s say he purchases a property, but does not qualify for permanent financing because he still has a bankruptcy for 18 months on his credit report. He could get an 18 month hard money loan to allow him to acquire the property, yet give him the 18 month time to get the bankruptcy off his credit report.
7. New Construction.
A borrower desires to invest in a new multifamily construction complex. Bridge financing could allow for the money and period of time required for building the multifamily construction complex, as well as time to get the complex occupied with renters. But, this is especially a type of bridge financing I recommend you don’t get involved with unless you have experience as a borrower with new construction, or a partner who is experienced.