What’s hard money lending?

Hard money lending is also known as private lending and equity lending. Hard money loans are sometimes referred to as bridge loans because they are short term, typically 1 to 5 years. They are low loan to value (LTV) with high interest rates and fees compared to institutional lenders. Borrowers usually use hard money loans to profit from real estate investments.

What are the differences between a hard money loan and a bank loan?

Property value is secondary to most banks; they prioritize your credit worthiness and ability to repay the loan. The critical criteria for most institutional (bank) loans available today is the ability to make the monthly payments. The ability to make payments is considered by hard money lenders, but it often falls well below the other criteria.

Hard money lenders, including us, prioritize the value of the real estate instead. We’re most concerned about equity and loan security. If a borrower doesn’t pay, we must be able to quickly and easily foreclose and sell the property and be assured we will recover our investment and associated costs.

The borrower’s exit strategy is a secondary concern. Since we only lend on a 1-year term, it is imperative that borrowers have a clear and plausible exit strategy. This applies whether you plan to sell the property or refinance. Exit strategies are described in our borrower case studies.

Hard money lenders provide speed and flexibility that is unmatched by conventional lenders. If you don’t squarely fit in the bank’s checkboxes, you might find yourself out of luck. We understand the strategic value in the availability of money.

The cost of the money is far less important than the availability when you find an amazing deal that your bank scoffs at but will earn you 6 figures in 6 months. Would you do a real estate deal with an expensive hard money lender if it meant you’d make a few thousand less or would you give up on the deal entirely?

Hard money loans are typically made at 50 to 75% loan to value (LTV) while institutional lenders will accept a much higher LTV. Little City Lending lends up to 75% LTV. So if fair market value is $200,000, we would be willing to make a loan up to $150,000. Our loans are strictly limited to 75% LTV or lower to protect our investment.

Where does the money come from?

Private individuals. We are a group of investors who choose to invest in residential mortgages. Our company services the loans and the cash investment comes from our group of investors, typically just one individual per loan.

Is cash at closing required?

If you’re getting a smoking deal, cash at closing is generally not needed. It’s tough to land smoking deals though, so in the example below the borrower would have to negotiate a lower purchase price to come to closing without $7,399. Keep this in mind when you make offers. You’ll need to get a contract for well under 75% of retail to come to closing without any cash.

We lend at 75% LTV, so we would lend up to $150,000 on something worth $200,000. Here’s an abbreviated version of what that would look like on a closing statement if your contract was also for $150,000.

  • Retail value: $200,000
  • Purchase price: $150,000
  • Title policy, homeowner insurance policy pre-paid for 1 year, survey and other closing costs (purchase closing only): $2,500
  • Loan amount: $150,000 (75% of retail value)
  • Origination fee to Little City Investments: $4,500 (3%)
  • Processing fee to Little City Investments: $399
  • Net funding from Little City Investments: $145,101
  • Cash from borrower at closing: $7,399, plus pro-rated interest (partial month) and taxes
  • Monthly payment: $1,625.00 interest, plus pro-rated taxes (at 13%)

If the retail value is truly $200,000 without additional repairs or significant expenses or concessions to the next buyer, the borrower would stand to net $30,000+ upon resale.

Have more questions about hard money lending?