Why Hard Money Loans Are the Perfect Solution For Underfunded Real Estate Developments

By November 7, 2018Lending
Traditional lenders are often limited by two crucial pieces of documentation that provide guidance for their commercial real estate lending opportunities. The first, a paper released by the Federal Reserve that details lending guidance for banks, was issued back in 2006. The second was introduced more recently in 2015 and was in direct response to the credit crisis. This Basel III rule requires banks who underwrite high-volatility commercial real estate (HVCRE) loans to hold 150 percent of its capital. HVCRE loans are considered to be those are family residential properties, commercial projects where the loan-to-value (LTV) ratio is higher and other challenging developments. 
Hard money lenders aren’t bound by these restrictions which makes them the perfect alternative for those real estate developments that aren’t able to secure traditional financing through a bank. This is where private lending companies are able to fill the void and help get underdeveloped real estate projects off the ground and completed. 
While most banks are able to underwrite a debt that has loan-to-cost (LTC) ratio of 60 percent at the most, private money lenders have the flexibility to look at other factors and think outside the traditional loan box. In fact, in some circumstances, there have been HVCRE projects that have been funded by private lending companies with 90 percent LTC and above.
With the demands for multiple family housing continuing the skyrocket as the senior population swells and millennials decide to rent rather than buy, developers need the innovative lending solutions that hard money lenders provide. As an added bonus, the turnaround time for such a loan is much shorter than a conventional loan. Developers who have the funding they need to complete a project within 30 days is not an abnormality.