What Is A Hard Money Lender?

Hard Money Lenders can be referred to as asset based lenders or private money lenders, but equity in the property is the common theme within their underwriting guidelines. Since direct Hard Money Lenders invest on behalf of individual investors, institutions, pensions and hedge funds, they don't have a conventional underwriting matrix that the loan must fit into for securitization purposes and instead rely more on a common sense approach.

Rather than write about how other Hard Money Lenders underwrite their loans, I'm just going to focus on my 4 tier underwriting approach that we use at Bridgelock Capital:

1. Equity: Equity for me is the first deciding factor into whether or not we are going to look any further into the file. If there isn't enough protective equity to protect our investment, then there is no need to look at the other 3 tiers. Different property types, conditions and credit risk require different equity protection.
2. Credit: Although we aren't credit driven within our underwriting process (yes we will lend to borrowers that have a credit score(s) under 500, in foreclosure or in bankruptcy), we want to make sure that the loan helps the borrower get ahead. Hard Money Lending needs to be looked at as a transitional loan that helps the borrower get out from under their lousy credit. I typically will require all collections and past dues to be paid with the loan proceeds, but can make exceptions if needed.
3. Clean Title: Anything effecting title will need to be paid through escrow. Our investments need to be protected and the only way to insure this is to make sure we have a clean title. This doesn't mean that title needs to be clean prior to bringing us a loan, but our loan needs to eliminate any and all title discrepancies.
4. Story: Every file has a story and since we are a common sense lender, we want to know the story behind the borrower. This doesn't need to be a war and peace novel, but just have the borrower explain the facts. Everyone experiences financial hardship in life and we can be there to help. But we want to understand the story!

There are a lot of lenders that try to classify themselves as a Hard Money Lender, but too often they are trying to fit a non-conventional borrower into a conventional matrix or simply brokering the loan to a direct Hard Money Lender. Be sure to deal directly with a direct Hard Money Lender and not someone who is just a middle person in the transaction.

So the next time you encounter a borrower that doesn't fit your conventional matrix, assess their situation and see if a private money loan would be a good alternative for them.