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