FAQs

What is a "hard money loan"?

A "hard money loan" is, at its simplest, a loan for hard cash. In the commercial real estate and lending business, a hard money loan is a non-conventional real estate loan, such as a privately funded loan, second/third/fourth trust deeds and equity loans. The lender approves a real estate loan request based on real estate equity or collateral. Typically, the loan-to-value ratios are such that the value of the property well exceeds the value of the loan.

Why do borrowers choose hard money loans over conventional loans?
Because hard money loans are not backed by government safeguards, there are less stringent underwriting guidelines required. Documentation that is typically required to apply for a conventional bank loan, such as income statements and tax returns, are not required to qualify for hard money loans.

With less paperwork required, the process for funding hard money loans is fast. Where a conventional loan may take months to process, a hard money loan can be completed in 10 days.

Who typically applies for hard money loans?

Equity-based lending offers a choice to borrowers for whom options are few. Borrowers of hard money loans qualify based on the value of their property more so than the quality of their credit history. People apply for hard money loans when they have credit problems, are in default, have had a foreclosure or bankruptcy, have been recently unemployed, or for some reason cannot provide proof of income.

The hard money loan is not only for those with difficult credit histories. Many hard money borrowers would qualify for conventional loans, but seek hard money loans because they simply want the money fast and do not have time for red tape.

In exchange for the benefits of the hard money loans, borrowers do assume higher costs than would be the case at conventional lending institutions. They must be willing to pay due diligence costs and closing expenses, including necessary 3rd party reports. Interest rates generally are 12% and higher, and points typically range from 3-7 points at the lender's discretion.

Why do private investors provide hard money loans?

For private lenders, the real estate market provides an investment opportunity that is more secure than the stock market yet offers higher rates of return than fixed rate investments such as savings or CDs with banks. While there is some perceived risk in lending to hard money borrowers, that risk is minimized by the fact that these loans are secured by a property's equity and that loan-to-value ratios are kept low. If a borrower defaults on his/her loan and the property is foreclosed on, the lenders recoup their investment through the sale of the property, or they become the owners of the property. All loans are secured by personal residences or apartment houses as collateral for the loan.

What happens if a borrower defaults on a private money loan?

At MBR, our borrowers are subject to a strict timeline and set of implications in cases of default. This is to protect the investments of our private lenders, without whom hard money loans would be impossible to provide.

What is the "loan-to-value" ratio?

The total amount of debt on the property, including our loan, divided by the appraised value of the home. The lower the number, the more conservative and safer the loan.

The maximum we will loan is 65% of the value of the property, however in most situations the Loan-to-Value Ratio is less than 60%

How will AB489 affect my ability to borrow?

Signed into law by Governor Gray Davis on October 11, 2001, AB489 is meant to add important safeguards to existing law in order to protect borrowers of certain home loans from lending practices and loan terms which are unfair or potentially deceptive. The small minority of firms practicing such "predatory lending" has posed a significant threat to consumer protection for many of California's most vulnerable citizens, including seniors, first generation immigrants, and lower income families. In addressing these lending abuses, AB489 establishes new protections for consumers in California.

However, as Governor Davis raised in his signing message to the members of the California Legislature, AB489 also precludes equity based lending for covered loans, even though it has been demonstrated that such loans serve a legitimate need. What this means is that this bill limits access to the equity in one's own property. In today's uncertain economy, equity-based borrowing has allowed displaced workers to support themselves as they secure new employment. Without this option, the alternative for many out-of-work homeowners will be to sell their home or assume credit card debt at interest rates far exceeding those incurred through an equity-based loan.

AB489 went into effect July 2002. For more information on this important piece of legislation, visit Governor Gray Davis' homepage at http://www.governor.ca.gov/state/govsite/gov_homepage.jsp