Commercial Financing and Hard Money is underwritten on a case by case basis. Unlike residential lending, commercial investment properties gets to a Commercial Brokers and than are viewed by some Commercial lenders as having more risk, and therefore underwritten more conservatively. Every a Commercial loan application transaction is unique and evaluated on its own merits, but there are a few common criteria lenders look for in commercial loan packages.
Financial Analysis
A key component in making an underwriting evaluation is the debt service coverage ratio (DSCR); this ratio is also frequently referred to as the debt coverage ratio (DCR). The DSCR is defined as the monthly mortgage debt compared to the net monthly income of the investment property in question. Using a DSCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment. The higher the DSCR ratio, the more conservative the lender. Most commercial lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of net income generated). Anything less then a 1:1 ratio will result in negative cash flow situation, raising the risk of the loan for the lender. DSCR's are set by property type and what a lender perceives the risk to be. Today, apartment properties are considered to be the least risky category of investment lending. As such, commercial lenders are more inclined to use lower DCR's when evaluating a loan request. Make sure that you are familiar with a commercial lender's DSCR policy prior to depositing money on an application. Ask them to give you a preliminary review of the transaction, whether a purchase or refinance. Information is free, mistakes are not.
Commercial Loan Request:
Commercial Hard money lenders are lending companies or Private Investors offering a specialized type of real-estate backed loan. Hard money lenders provide short-term loans (also called a Bridge Loan) that provide funding based on the value of real estate that has been collateralized for the loan. Commercial Hard money lenders typically have much higher interest rates than banks because they fund deals that do not conform to bank standards.
Commercial Hard money lenders will offer a range of requirements on the loan-to-value percentage, type of real estate and minimum loan size for a hard money loan.
Hard money risk
Commercial Hard money loans are more expensive because they are not based upon traditional credit guidelines which protect investors and banks from high default rates. As hard money lenders do not require the income verification that typical lenders require, they experience higher default rates (and, thus, charge a higher rate of interest). Individuals and companies may opt to take a hard money loan when they cannot obtain typical mortgage financing because they do not have acceptable credit or other necessary documentation.
Hard money collateral
Hard money collateral is typically the real estate loaned on. However it can and does sometimes include other assets of the individual or business borrowing the hard money. In many cases a hard money lender will offer a smaller loan size based upon a lower "Loan To Value Ratio". This means they may opt to loan no more than 65% of the property value. Therefore it is common for real estate investors to offer additional real estate as collateral in order to obtain a larger loan amount. This is known as Cross- Collateralization.
Hard Money Market
Commercial Hard money lenders may serve a regional market, or may offer loans nationwide. Some hard money lenders are represented by brokers who may take a percentage of the loan (called points) in exchange for preparing and submitting the loan documentation (as well as finding a direct lender). Other hard money lenders deal directly with applicants. Other ways hard money lenders may vary include: charging application fees (some charge, others charge fees only when closing); prepayment penalties (some or none); and a focus on investment properties or a willingness to finance owner occupied property as well.
Several online directories offer links to multiple hard money lenders for brokers or borrowers seeking a lender.
Hard Money Regulation
Several states' usury laws, including Tennessee and New Jersey, prevent hard money lenders from operating with their usual practices. Regulation of hard money not only differs by state, it differs by the status of the borrower in terms of whether or not the loan is made to a business or to a consumer. Consumer's generally have additional protections in individual states. They also have more lending oversight and regulation benefits federally when the loan is issued by a commercial bank, that is federally chartered by the FDIC. Some of the most aggressive loan terms are issued by commercial hard money lenders. DCLXC
Commercial hard money lender
Commercial hard money is issued to a business entity or individual signing on behalf of a business entity or corporation. It can be secured against a commercial property or residential investment property. It can also be secured against a residence in conjunction with a business property as a means of obtaining additional collateral for the lender. That type of additional security is referred to as a blanket mortgage. The sources of asset based commercial hard money loans are generally the following:
- 1. Private Individuals
- 2. Mortgage Companies
- 3. Federal Banks
- 4. SBA Lenders
These commercial hard money lenders all have varying degrees of benefits as well as downfalls in terms of choosing a commercial hard money loan lender. For example, a private individual may offer special terms, however may be unwilling to offer a work out plan as a matter of procedure, in the event the loan becomes delinquent. A federally-chartered bank may offer a competitive loan rate in comparison to an individual, however may demand a high pre-payment penalty fee, costing the borrower more money if they decide to sell or refinance the loan within one to five years.
Hard Money Loan Definition
Loan to Value(LTV) Ratio & Hard Money
Commercial Hard Money Loan Underwriting Guidelines
Types of Hard Money Loans
Investors Hard Money
Mortgage & Real Estate Broker Referral
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