Unlocking the Secrets of Commercial Hard Money Loans: A Comprehensive Guide

As the real estate industry continues to grow, so is the demand for financing options. Among these options is commercial hard money loans, which have become increasingly popular among investors, developers, and flippers. A hard money loan is a type of financing that relies on collateral instead of credit scores and income to determine the borrower’s eligibility.

Commercial hard money loans specifically tailored for commercial properties, such as office buildings, retail spaces, and industrial buildings. They provide funding for a variety of purposes, including purchase, construction, renovation, and refinance. However, before choosing a commercial hard money loan, it is important to understand its features, benefits, risks, and requirements.

This comprehensive guide will help unlock the secrets of commercial hard money loans, from their definition to their application process and repayment terms.

What are Commercial Hard Money Loans?

Commercial hard money loans are short-term loans for to borrowers by private investors or private lending companies secured by a commercial property. The loan usually collateralized by the property meaning that the value of the property determines the amount of the loan rather than the borrower’s credit score or financial history.

These loans have a higher interest rate than conventional loans since these loans have a higher risk profile. However, commercial hard money loans are suitable for borrowers with bad credit scores, who need a faster closing process and loans for buy-and-flip transactions.

The average loan amount offered by most lenders is between $75,000 and $2.5 million, with the maximum being up to 75% of the commercial property’s value. Usually, the terms of commercial hard money loans range from 3 to 36 months.

How to Qualify for a Commercial Hard Money Loan?

Qualifying for a commercial hard money loan is easy compared to qualifying for other types of loans. Since it’s based on the property’s worth and not the borrower’s credit score, here are the basic requirements for qualifying for a commercial hard money loan:

1. Property Valuation: Unlike traditional lenders, hard money lenders rely on the property’s value instead of the borrower’s financial history to determine the amount of the loan they can offer. Some lenders use the loan-to-value (LTV) ratio, which is the ratio of the loan amount to the property’s value. Most lenders require an LTV between 65% to 75%.

2. Equity: Hard money lenders prefer to work with borrowers who have a lot of equity in their property. The more equity a borrower has, the lower the risk associated with the loan. Usually, the loan amount provided is roughly 70% of the equity available.

3. Exit Strategy: Hard money lenders require a solid, well-thought-out exit strategy, or repayment plan, from their borrowers. Since these loans are short-term and come with high-interest rates, investors must have a plan to repay the loan quickly.

4. Financial stability: While the borrower’s credit score and financial history is not a major factor in the loan decision, hard money lenders still require borrowers to provide evidence of their financial stability. Hard money lenders need to know that you have a solid financial background that indicates you can handle the loan payments.

What are the Benefits of Commercial Hard Money Loans?

The benefits of commercial hard money loans include:

1. Quick Approval Process: Unlike traditional loans, commercial hard money loans have an expedited approval process. Lenders can take only a few days to approve the loan and then provide the funds.

2. Less Stringent Qualification Criteria: Commercial hard money loans are given to people with less than perfect credit and less documented income. This lack of stringent qualification criteria makes it easier for borrowers to qualify for the loan.

3. Flexible Repayment Terms: Unlike traditional loans, which have long term repayment periods, commercial hard money loans tend to have shorter repayment terms. Furthermore, repayment terms can be customized according to borrower needs.

4. Loan Customization: Private commercial hard money lenders provide their borrowers with customized loans to suit their specific needs. Applicants for loans can customize the loan’s terms to fit their needs such as loan amount, repayment period, and interest rate.

5. Diverse Property Coverage: Commercial hard money loans offer borrowers the ability to finance a variety of property types, such as office buildings, retail spaces, and industrial real estate. This means more diverse opportunities for investment.

What are the Drawbacks of Commercial Hard Money Loans?

While commercial hard money loans offer numerous benefits to borrowers, like any other type of loan, they have their drawbacks. The most common disadvantages are:

1. Higher Interest Rates: The interest rates on commercial hard money loans tend to be significantly higher than conventional loans. Because hard money lenders assume greater risks, they charge higher interest rates, typically ranging from 10% to 20%.

2. Short Repayment Periods: Commercial hard money loans’ terms are short, usually ranging from 3 to 36 months. The borrower, therefore, has a shorter time to repay the loan than with conventional loans.

3. Low LTV ratios: Hard money lenders assume a lot of risks since they lend funds based on the property’s value rather than the creditworthiness of the borrower. Consequently, they tend to have a lower LTV ratio, which limits the amount of money the borrower can obtain.

4. Fees: Commercial hard money lenders tend to charge various types of fees like origination fees, underwriting fees, or application fees. Sometimes, these fees can range from 2% to 5% of the total loan amount, depending on the lender.

5. High Risk: Commercial hard money loans are considered high-risk loans due to their short terms and high-interest rates. The risk of default is also higher due to the borrower’s potential lack of financial stability.

The Borrower’s Benefits Vs The Lender’s Benefits

A Commercial hard money loan provides benefits to both the lender and the borrower.

For the borrower, this type of loan provides an opportunity to secure short-term funding for their project, often with a quicker closing process than conventional loans. It is also an attractive option to borrowers with low credit scores, who have difficulty obtaining conventional bank loans.

Additionally, Commercial hard money loans offer borrowers the opportunity to customize their loan terms to fit their unique needs.

From the lender’s perspective, hard money loans offer the possibility of achieving high returns on their investments. Besides, lenders can close loans faster than they would with traditional loans. This speedy process translates to increased profits and the opportunity to invest in more projects.

Lenders also have the ability to work with a diverse range of borrowers and properties while minimizing their risks by generically charging higher interest rates and offering short term repayment periods.

How to Apply for a Commercial Hard Money Loan?

Applying for commercial hard money loans doesn’t require an extensive application process or a lot of paperwork, one of the reasons this lending option is preferred by many. To apply for a commercial hard money loan. here are four steps you should follow:

1. Gather Your Information: Collect all the relevant information, including the property’s address, property value or purchase price, any appraisals, and income history.

2. Approach a Lender: Find a reputable and reliable hard money lender. You can find them online or through recommendations. Once you find a lender that suits your needs, submit your application with all the necessary information. The lender will then review the application.

3. Receive the Loan Offer: Assuming the lender approves your loan application, you’ll receive a loan offer outlining the terms of the loan such as the amount borrowed, loan term, and interest rate. You’ll also receive the lender’s fees and any other costs that you may incur.

4. Close and Disburse the Loan: If you accept the loan offer, the lender will proceed to close the loan. After this stage, the funds are then disbursed to you, and you can begin to use them for your project.

Conclusion

Commercial hard money loans are a popular option for real estate investors looking to acquire funding quickly and without hassle. The loans are secured by the property, making them ideal for borrowers with less-than-perfect credit scores.

These loans offer fast approvals, customized terms, flexible repayment periods, diversity in property coverage, and the ability to be utilized in diverse property types. They also have higher interest rates, short repayment periods, lower LTV ratios, and fees.

To qualify for a commercial hard money loan, borrowers need to have equity in the property, the loan purpose must pass an exit strategy, and have a valuation of their property.

Overall, commercial hard money loans provide a unique lending possibility that you may explore. Nonetheless, before obtaining one, it is worth considering various lenders, understanding the loans’ legal aspects, and measuring the potential payoffs and risks.