Business Loans

Hard Money or Conventional? What’s best for you and how are these loan types different?

More and more in today’s tough economic market, I find that we are closing more and more Hard Money loans for borrower’s with good credit and decent properties. So, what’s going on? Why not conventional commercial financing?

First, the conventional markets are operating under the premise that the world has come to an end, or will do so shortly. In order to survive such a disaster, the conventional lending sources have turned of the money facet to all but of their super best borrowers (and they are not immune to the current shut off).

By scalling back maximum loan amounts, lowering LTV’s, increasing credit and liquidity standards, the banks have closed their doors on the majority of borrowers they would normally have welcomed a few short months ago.

Differences in lending models and loan types.

Conventional lending is traditionally amortized over 20 to 30yrs and will require principal and interest payments as well impounding for property taxes in the montly payment. The money is relatively cheap and has lower fews and servicing costs becuase it requires stringent qualifying standards for the borrower to meet. Assuming a normal market (early 2008), most banks offered loans in the 5.99% to 7.99% range on the average and at a cost of PAR (no points) to 2pts in fees, plus third party costs and LTV’s up to 80-90%. With the credit crisis in full swing–these types of terms are still advertised, but not readily available or the ability to qualify is too steep for most to reach. The banks have increase the minimum credit score requirements from 600 to 660 and reduced the maximum LTV’s to 65%-75%. And if you can get the loan, there still the prepayment penalties, lock outs, defeasance clauses, etc. which in many banks cases, have risen these restricitive covenants. (SBA is still possible up to 90% LTV on a majority of property types).

Going from a 90% max LTV to a 75% max LTV may not look that daunting, however, when you are talking about the purchase of a $6,000,000 warehouse, the diffierence is huge. Instead of a cash infusion of $600,000 (min.) you now need $1,500,000! And even if you can meet that requirement, your credit may no longer be acceptable.

Commercial Hard Money lending on the other hand is a viable option when the bank says NO. However, you must realize that these funds are going to more costly and be for a short period of time. Generally commercial hard money terms are 12-36 months, interest only payments, and have maximum LTVs of 55-65% and will carry fees in the 2-6+pt range. The rates are not to be under estimated either. The gambit runs from 10.5% to 18.00%. On the bright side, prepayment penalties can from None to 12 mos., thereby allowing the borrower to get the immediate needs met to close the transaction and then have the time available to seek more perminant financing without losing the property.

Similarities in lending models

Wheather the deal is conventional or hard money, both lending models want the same basic information to make a determination as to the value of deal and property.

Application on all principals (standard FNMA 1003 works)

Appraisal

Property’s income and expenses (trailing 2-yrs and YTD)

Source of funds for down and closing costs

Use of funds letter (especially if a cash out transaction)

Borrower’s income

Guarantee by borrower

Copies of leases, rent rolls, tenant estopples and assignments of rents/leases

Tri-merge credit report on all principals

Title report, environmental reports, copies of purchase agreements, closing service provider (attorney or escrow).

Wake up and smell the solution

One of the biggest hurdles in dealing with brokers and borrowers is that they do not want to believe or accept that hard money financing is all they can get and that they deserve bank rate type products.  Ok, listen up and listen with both eyes and both ears. You may not have any other options available to you and in crashing market this may be your only saviour. This is not a long term situation–it is temporary. A “bridge” to get from one point in time to another. (unlike that bridge in Alaska, this one goes somewhere).

We know that hard money is more of the solution today than ever before. We also know that with the right hard money deal, that when the market gets improves that the borrower will return to refinance out of that hard money loan. Treating the borrower correctly keeps you in play for that future business.

To learn more about the other types of commercial financing that we have available, pleae visit our web sites: www.cfrloans.com and www.mycommerciallendingpro.com