Hard Money Gone Soft
Some lenders have stepped up to take the sting out of high-rate, high-closing-cost loans
By Milton Franklin, president and CEO, Nationwide Business Consultants of South Florida Inc.
In the past, commercial mortgage lending encompassed two extremes. On one end, banks had the lowest rates with the highest documentation
requirements. At the opposite end, hard-money lenders required little documentation, if any, and had extremely high rates.
Banks were the haven of applicants
with excellent credit scores, lengthy employment records, available downpayment
funds and full documentation. They also
helped less-than-perfect loan candidates
and those who could not fully document
income or employment.
Hard-money lenders, on the other hand,
typically served borrowers who had track
records of late payments, bankruptcies, default judgments and tax liens. Their sector
gained the term “hard money” because it
was exactly that — expensive in terms of
interest rates and requiring high points as
closing costs. The money was “hard” to
come by and “hard” to pay for.
With the country’s economic crisis,
however, banks have essentially withdrawn
from lending, leaving those more-qualified
loan applicants and those with less-than-stellar credit ratings or incomplete documentation without funding sources. Most
of these borrowers hesitate to use traditional hard-money lenders’ services because of the greater expense. This is leaving
many commercial real estate projects idle,
with their principals waiting for the market to rebound and for things to revert to
normal. But who knows when, if ever, the
market will return to its former state?
Mortgage brokers should be aware of
a hybrid lender that is filling this void and
that can help their clients without the expense of traditional hard money — the
“soft” hard-money lender. These funding
sources typically offer slightly higher rates
than banks while also offering the same
ease of documentation and higher loan-to-value ratios (LTVs) previously limited to traditional hard-money lenders. Some of their
requirements are comparable to banks,
which could make them more appealing to
some commercial mortgage borrowers.
Project and applicant details
Soft hard-money lenders are funded by private investors, hedge funds and other nontraditional funding sources. These lenders
typically base their loan decisions wholly
on property considerations and business
operations. They don’t weigh borrowers’
creditworthiness as heavily.
These lenders offer the same flexibility
as traditional hard-money lenders. There
are no credit, income or employment
requirements. Borrowers’ bad credit —
including bankruptcies, collections, judgments and more — often are overlooked.
Borrowers’ experience in managing
similar projects is an important facet of
the approval process. Lenders want to
know that the project will generate enough
cash flow for loan repayment. The project,
local-market considerations, geographic
location, real estate value and the principals’ experience are the deciding factors.
Collateral is required, usually in the
form of real estate. Vehicles, watercraft
and aircraft may also be considered as
possible cross-collateral, however. Equity
loans and second- or third-position liens
also are possible.
These private lenders tend to process applications more quickly than banks. They
often can give preapprovals in as little as
24 hours and fund loans as quickly as 48
hours into the process.
A typical scenario would start with the
submission of a project’s basic information.
About 48 hours later, the lender will issue a
Continued on Page 30
Milton Franklin is president and CEO of
Nationwide Business Consultants of South
Florida Inc., which maintains direct relationships with nontraditional funding sources and
offers creative-financing products and services
designed to help clients withstand today’s
marketplace. Nationwide also offers strate-gic- and referral-partnering opportunities to
commercial mortgage brokers whose projects
need financing. A graduate of Wharton Business School, Franklin is a business-financing
consultant with 24 years’ financial-services
experience. Reach him at (786) 506-3578 or