Hard money and private commercial loans

What hard money is for

A hard money lender looks at the property and the equity in it first, and at the borrower second. That makes it the right call in a narrow set of cases:

• a purchase that must close in days, such as an auction or a seller’s deadline;
• a property no institution will lend on yet: vacant, damaged, mid-dispute, or with title problems being cured;
• a borrower with a recent credit event, a foreclosure in the past, or no track record;
• a maturing loan that must be paid off now while a permanent refinance is arranged.

Private lenders protect themselves with collateral as well as price. One public private lender describes its typical security as a first mortgage, often with extra collateral, an ownership pledge or personal guarantees¹. It also states that it lends to investors only, no owner-occupant residential loans¹, which is common: private lenders avoid owner-occupied homes because consumer lending rules then apply.

Worked example: what a short hold really costs

Illustration only. Rates, points and terms are assumptions.

A buyer borrows $1,500,000 for 12 months at an assumed 12.00% interest-only with 3 points.

Cost	Amount
Points at closing (3%)	$45,000
Interest for 12 months	$180,000
Total if held the full term	$225,000

Now suppose the buyer refinances into a bank loan after 4 months, but the note carries 6 months of minimum interest:

Cost	Amount
Points	$45,000
Interest actually accrued (4 months)	$60,000
Minimum interest top-up (to 6 months)	$30,000
Total for 4 months of use	$135,000, about 9% of the loan

Points and minimum interest are front-loaded, so a short hold is expensive per month. Compare the total cost with an institutional bridge loan if you have even a few extra weeks. Add up third-party and legal costs in the closing costs calculator.

Usury: the state rules matter

Commercial loans are not exempt from usury law everywhere. A few examples from primary statutes:

State	Rule
New York	Civil cap 16% per year2; exempt at $250,000 or more3; criminal usury above 25% per year4 applies below $2.5 million or more3
Florida	A rate above 18% simple interest per year5 is usurious. On loans of more than $500,0005, a rate is usurious only above 25% per year6 (a misdemeanor), and above 45% per year6 is a felony

Points, fees and default interest can count toward the rate in a usury test, depending on the state. This is a summary, not legal advice.

Terms that matter more than the rate

Term	What to check
Points and fees	Lender points, broker points, underwriting, processing, draw and extension fees
Minimum interest	How many months, and measured on the full loan or the funded balance
Interest reserve or prepaid interest	Held back from proceeds, which lowers the cash you actually receive
Extension	Whether it is a right or at the lender’s discretion, and the fee
Default rate and late fees	How they are triggered and whether a maturity default triggers them automatically
Guaranty and extra collateral	Personal guaranty, pledges of other property or ownership interests

What private lenders check

1. Value and equity, from their own appraisal, broker opinion or site visit.
2. The exit: sale or refinance, with evidence it is realistic.
3. Title and liens, including taxes, mechanics’ liens and judgments.
4. The borrower’s story for why an institution is not doing the loan.
5. Insurance and entity documents.

Common deal killers

• No equity. Private lenders cut proceeds hard when value is uncertain.
• An exit that depends on a permanent loan the property cannot qualify for.
• Unresolved title or tax issues that the lender cannot insure over.
• Owner-occupied residential collateral mixed into the deal.

Where it wins and where it loses

Hard money wins on speed and on files nobody else will take. It loses on cost to every institutional option, and the higher rate and default terms punish delays. Use it as a short bridge to something better: a bridge loan once the property is presentable, a DSCR loan once it is leased, or a bank loan once the credit story is clean.