Traditional vs Commercial Hard Money Loans

Traditional and commercial hard money loans are essentially the same types of contracts just with very different limits and purposes. With a traditional loan, the hard money contract is much smaller, encompassing just one residential property. A commercial hard money loan knows no limits; the property being used as collateral could be a very large development, often topping tens of millions of dollars in value. This type of loan, then, requires very different buyer profiles.

Hard Money vs. Mortgage Loans

Commercial loans are not that different from mortgage loans in their purpose: they both use a piece of property as collateral for a loan to purchase that property. The key difference is the fact that a hard money loan has lower credit requirements. The requirements are lower because the lenders are non-traditional, typically independent financiers or their companies. In exchange for a loan to a bad credit borrower, a hard money lender will require a much larger down payment. In fact, the loan will typically only be made at 70 to 80 percent of the property value. Then, if the borrower defaults, the financier seizes 100 percent of the asset, often turning a profit on the default.

Traditional vs. Commercial Loans

Traditional loans are made to residential clients for single-family properties. Commercial loans, on the other hand, can be used to purchase real estate for any number of functions. Commercial loans are used to buy entire apartment buildings, office buildings or new residential developments. These loans play a critical role in our economy. If you own a home that you purchased from a builder, you are in a home that was likely financed with a commercial loan. If you have an office

Qualifying for a Hard Money Commercial Loan

As previously noted, you do not need to have stellar credit to qualify for a hard money commercial loan. Your business will likely need to have a solid business plan that leads the financier to believe your venture will succeed. Experience in the industry or a record of profits on commercial property purchases will help your cause. Above all else, though, you simply need a big bulk of the payment. The more of the payment you can make on your own, the better your chances of securing a hard money loan to cover the remainder. Many businesses seek investor finances to come up with the large down payment required.

Risks of a Hard Money Commercial Loan

A hard money commercial loan is much riskier than a traditional commercial loan. If you default, you do not get to keep the 30 to 40 percent down you placed on the property. Instead, the lender will seize the entire asset, liquidating the asset to cover the remaining loan sum. Any additional amount beyond the loan sum recovered through the foreclosure goes into the lender's pocket and not back into yours. The commercial mortgage market has a much slower turnover than the residential market as a whole. It could be years before a commercial property sells, and lenders cover their losses with this protection.

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