The Different Types of Hard Money Loans

If you’re new to hard money lending, you’re probably not aware of the many different types of hard money loans that real estate investors regularly use to finance new acquisitions and to make renovations to existing properties. This growing segment of the mortgage market continues to provide capital for properties that are not bank financeable due to their condition or to high vacancy rates. Hard money loans are used all the time but their usage outside the real estate industry is not widely known or understood.

This blog post will cover the different types of hard money loans that real estate investors are using, including:

  • Bridge Loans
  • Cross-Collateral Blanket Loans
  • Commercial Property Loans
  • Construction Loans
  • Fix & Flip Financing
  • Owner Occupied
  • Rental Property
  • Second & Third Mortgages

Let’s get started….

Bridge Loans

HOUSE WITH BRIDGE IN THE BACKGROUND

A hard money bridge loan is a short-term loan with a term of 6-24 months and a balloon payment at the end. Bridge loans can close as quickly as 24 hours but usually take about 7-14 days. Real estate investors use bridge loans for a wide variety of purposes, including:

  • Purchase a fixer upper
  • Acquire a home at foreclosure auction
  • Acquire a vacant commercial building (banks usually don’t finance vacant buildings)
  • Refinance an investment property to make repairs prior to sale
  • Pay off a construction loan on a completed spec home
  • Pre-development land acquisition

I could probably expand the list above from 6 to 100 different ways investors use hard money bridge loans. There are so many unique situations that come up in real estate and hard money bridge loans are a viable option to help investors solve a problem or act quickly on a new opportunity that requires a quick closing.

Cross-Collateral Blanket Loans

Hard Money Cross Collateral Blanket Loans

Cross-collateral blanket loans, which are also called multi-property loans, consist of one Note secured by two or more properties. At FCTD, we originate several cross-collateralized loans each month, using one property with significant equity as additional collateral for either a zero to 10% down payment on a new purchase or to help a borrower obtain a cash-out refinance. The subject property may have 90% to 100% Loan-To-Value (LTV) but when combined with the additional collateral, the Combined Loan-To-Value (CLTV) comes will be between 50-65% CLTV.

Below are a few examples of recent cross-collateral blanket loans:

  • Acquiring an empty commercial building for $7,000,000 with 5% down payment, using 10 additional rental properties to reach a 65% CLTV across the 11-property portfolio.
  • Zero down purchase 7 SFR rental portfolio in probate sale using 3 existing SFR rentals owned free & clear.
  • Reverse 1031 Exchange – 1 loan secured by 5 SFR rentals

Commercial Property Loans

Hard Money Commercial Loans

Hard money commercial loans are used by investors on the following types of properties:

  • Apartments
  • Assisted Living Facilities
  • Cannabis / MMJ
  • Condotel
  • Gas Stations
  • Hospitality / Hotel / Motel
  • Land
  • Medical Office Buildings
  • Mixed-Use
  • Office Buildings
  • Retail Buildings
  • Warehouse / Industrial Buildings

Commercial loan terms range from 6 months to 15 years, dependent upon the property and the situation. For example, FCTD has originated several loans on both cannabis grow and retail buildings with a 15-year fully amortizing loan because it was in the best interest of the borrower to go with a longer term rather than a 24-month term where they’d have to pay fees to extend the loan or obtain financing from a new lender.

Construction Loans

Hard Money Construction Loan

Hard money construction loans can be used for residential and commercial properties. On the residential side, real estate investors use them to build apartment buildings, single family spec homes, and subdivisions. For commercial construction loans, FCTD has originated use hard money loans to build warehouses, retail, office, and cannabis grow facilities.

Many real estate investors use hard money construction loans because they can be easier to obtain and are often funded in as little as two weeks. In comparison, bank construction financing can take 30-90 days, depending on the scope of the project.

Recently funded scenarios:

  • 20 single family construction loan
  • 18-unit condo development
  • Single family oceanfront spec home
  • 4 townhouse development

The one thing we cannot fund is owner occupied hard money construction loans. Those are best served by banks offering construction loans.

Fix & Flip Financing

Hard Money Fix Flip Financing

Fix and flip loans are exactly what they sound like. Real estate investors acquire fixer uppers using a hard money loan that funds the acquisition and provides financing for the rehab, or renovation, of the property.

The hard money lender usually provides 75-85% LTV on the purchase and 80-100% of the rehab financing. This kind of leverage allows an investor who is highly skilled at managing projects to take on more projects at the same time.

Below are a few recent fix & flip scenarios:

  • Fix & Flip in Santa Ana (wholesale transaction) – 85% Purchase | 100% Rehab
  • Fix & flip in Pasadena – 80% Purchase | 80% Rehab
  • Fix & flip in San Francisco – 85% Purchase | 100% Rehab

Owner Occupied Loans

Owner Occupied Hard Money Loan

Owner occupied hard money loans are much sought by home buyers with credit challenges but mostly given to highly qualified borrowers who ran into a last-minute underwriting condition that caused them to change from bank financing to a short-term hard money loan.

In hard money lending, owner occupied loans, or consumer purpose loans, are a very small percentage of the loans across the industry. As I wrote in this blog post on business purpose and consumer purpose loans, I estimated that only 5-10% of hard money loans are for consumer purpose, such as on a primary residence.

For people with bad credit trying to buy a house, it’s best to wait to buy until you’ve improved your credit to the point where you can obtain an FHA, VA, or Conventional loan, which offer low down payment programs.

Most owner-occupied hard money loans go to highly qualified borrowers with excellent credit, income, reserves, at least 30% down payment, and have a very clear exit strategy to pay off the short-term hard money within one year.

Below are a few recent examples of owner-occupied hard money loans:

  • Last minute bank turndown due a PPP loan. 100% financing using a free & clear rental property as cross-collateral for the loan.
  • Self-Employed less than 2 years – 50% LTV
  • 3-Day Notice to Perform issued and they had to switch from a jumbo loan to hard money in order to not lose their $50,000 deposit.

Rental Property Loans

Hard Money Rental Property Loans

Hard money loans on a rental property can be a short-term bridge loan or it can go out to 5 or even 15 years. Ideally, we want borrowers to use hard money on rentals for 6-24 months, but there are some situations that call for longer periods, including:

  • Vacant property
  • Cannabis tenants
  • Less than 4 years removed from a bankruptcy or foreclosure
  • Recently out of a divorce
  • Inherited a rental property or portfolio of rental properties
  • Credit scores temporarily too low for conventional or NonQM loans

Longer-term hard money on rentals is not ideal but it does happen. I spend most of my time doing takeout financing, getting FCTD’s borrowers out of hard money and into 30-year bank, conventional, or NonQM loans on their rental properties.

Second & Third Mortgages

Hard Money Second and Third Mortgages

Hard money second and third mortgages are mostly used on rental properties or in a cross-collateral situation. FCTD has originated second, third, and even a few fourth trust deeds over the years for long-time real estate investor clients who usually have a delay in the project they’re selling but need to close quickly on their next project. So, we use the significant equity position in one of their properties, or multiple properties, to get them the second, third, or fourth mortgage.

Second mortgages carry a higher interest rate in the 11.00% to 13.00% range (probably higher in 2023 as interest rates are expected to rise), are for 12-36 months, have higher upfront costs than first trust deeds, and 60-65% CLTV.

In California, FCTD can originate second mortgage HELOCs against a primary residence or investment property if the use of funds is for business purposes only. No consumer purpose hard money HELOCs.

Outside California, the second mortgages will have a lower CLTV in the 50-55% range since the majority of FCTD’s trust deed investors are based in California and not as familiar with the real estate markets in other states.

Conclusion

As you can see, there are several different types of hard money loans used by real estate investors for various purposes. Most of the hard money loans are secured by investment properties while a small percentage are for consumer purposes. As a mortgage broker, FCTD works with a diverse group of borrowers with specific financing needs, which, over the years, can be 4 or 5 of these different types of loans. For me, this is what makes the hard money lending niche in the mortgage market so interesting and enjoyable!