| Investors who have previously been able to | | | | investors, the market for subprime mortgages |
| qualify for 100% purchase financing to | | | | has adjusted sharply. Investors are |
| acquire investment properties are now facing | | | | demanding that originators employ tighter |
| much different conditions in the investor | | | | underwriting standards, and some large |
| loan market place. Programs for investor | | | | lenders are pulling back from the use of |
| loans have literally evaporated under the | | | | brokers. The reassessment and resulting |
| pressure of the subprime mortgage debacle. | | | | increase in the attention to loan quality |
| Many investors who formerly depended on | | | | should help prevent a recurrence of the |
| subprime mortgage programs and ARM loans, are | | | | recent subprime problems. Nevertheless, many |
| now seeking hard money loans for real estate | | | | homeowners who took out mortgages in recent |
| purchases and rehabs. Demand for hard money | | | | years are in financial distress." |
| loan programs nationwide has steadily | | | | |
| increased. Real estate investors are | | | | Tighter underwriting standards for investors |
| discovering that hard money lenders are | | | | mean that fewer investors will qualify for |
| funding both residential and commercial | | | | loans without substantial down payments, |
| investments. | | | | generally in the 20% to 30% range. These |
| | | | strict underwriting requirements for real |
| According to Wikipedia: A hard money loan is | | | | estate investors will also lead investors to |
| a species of real estate loan collateralized | | | | pursue more creative real estate funding |
| against the quick-sale value of the property | | | | options such as seller financing, carry-back, |
| for which the loan is made. Most lenders fund | | | | and hard money funding for purchase or rehab |
| in the first lien position, meaning that in | | | | "fix and flip". While the markets are |
| the event of a default, they are the first | | | | correcting, real estate investors are already |
| creditor to receive remuneration. | | | | gravitating to programs where they can obtain |
| Occasionally, a lender will subordinate to | | | | readily available funding to purchase |
| another first lien position loan; this loan | | | | investment property. |
| is known as a mezzanine or second lien. Hard | | | | |
| money lenders structure loans based on a | | | | Many hard money lenders are willing to loan |
| percentage of the quick-sale value of the | | | | up to 100% of the purchase on a property, |
| subject property. This is called the | | | | given the fact that the property LTV is |
| loan-to-value or LTV ratio and typically | | | | approximately 70% or lower. These lenders are |
| hovers between 60-70% of the market value of | | | | also willing to loan money for "rehabbing" |
| the property. For the purpose of determining | | | | the property and even structuring the loan so |
| an LTV, the word "value" is defined as | | | | no monthly payments are required for 3 to 6 |
| "today's purchase price." This is the amount | | | | months. These features make hard money loans |
| a lender could reasonably expect to realize | | | | very attractive to the investor, especially |
| from the sale of the property in the event | | | | during times when property inventory is |
| that the loan defaults and the property must | | | | increasing and properties can be purchased at |
| be sold in a one- to four-month timeframe. | | | | substantial values. At the present time, |
| This value differs from a market value | | | | rates for hard money are in the 10% to 16% |
| appraisal, which assumes an arms-length | | | | range and hard money lenders are charging |
| transaction in which neither buyer nor seller | | | | "points" typically, 1-3 more than a |
| is acting under duress. | | | | traditional loan, which would amount to 3-6 |
| | | | points on the average hard money loan. |
| Chairman Ben S. Bernanke who testified Before | | | | Commercial hard money loans range from 4 to |
| the Committee on Financial Services, U.S. | | | | 10 points. Investor credit may or may not |
| House of Representatives on September 20, | | | | factor into a hard money loan due to the fact |
| 2007 regarding subprime mortgage lending and | | | | that the funding is based on the "hard" asset |
| mitigating foreclosures stated, "Markets do | | | | value of the property collateralizing the |
| tend to self-correct. In response to the | | | | loan. |
| serious financial losses incurred by | | | | |