Hard Money Multifamily Loans

A hard money loan is generally the easiest type of multifamily loan to get and is often available in situations where traditional bank loans or agency financing is impossible to obtain.

These situations include scenarios where the borrower has bad credit or legal issues, as well as short sales, REO properties, probate and inheritance situations, trust deed investments, fix-and-flips, owner-occupied properties, and distressed property investments. They can also be used in scenarios when closing a deal quickly is essential.

In general, these loans are considered “no-doc” or “low-doc” loans, as they require little to no personal documentation on behalf of the borrower.

Hard money loans are available for a wide variety of property types, including multifamily loans, single-family homes, and a diverse array of commercial properties, including retail, industrial, office, and hospitality properties.

Despite their flexibility and high approval speed (many loans are approved within 24 hours. these loans do come with certain drawbacks. For one, hard money lenders generally offer higher interest rates than other types of loans (often 8-20%), and many are notorious for attempting to repossess a property after only one missed mortgage payment.

Hard money loans are also generally full-recourse. This means that, if you default on your loan, your lender can attempt to repossess your personal property to make themselves financially whole.

This is allowed even if the lender has already repossessed the real estate backing the loan. Hard money loans, in general, are considered a form of asset-based lending. LTVs for hard money loans vary significantly between lenders, with some only willing to finance properties at 65-75% LTV, while others are willing to finance up to 90% LTV (or even 100% LTV). These higher-leverage loans, however, generally have even higher interest rates than other hard money loans due to their increased default risk.

Hard money loans can be a great way to stabilize a multifamily or commercial property, increase NOI and DSCR, then refinance it using lower-cost, non-recourse CMBS loans, Fannie Mae multifamily loans, Freddie Mac multifamily loans, or bank debt.

It should be noted that there are also many types of hard money loans, including DSCR loans, ARV loans, and even long-term, 30-year hard money loans.

Prospective Hard Money Loan Terms For 2022

• Size: $100k to $5 million+

• Maximum LTV: 55-90+% (more in some cases)

• Loan Term: 6-36 months

• Interest Rates: Generally 8-20%

• Origination Fee: 3-5%

• Interest Rates: Fixed and variable rates available, interest-only (I/O) options available 

The Pros and Cons of Hard Money Loans

Hard money loans have both pros and cons, as we detail below:

The Pros of Hard Money Loans:

• High Flexibility: Hard money lenders are neither agencies nor banks, each of which has pre-set legal and regulatory requirements regarding the loans they can issue, including credit requirements, property inspection requirements, and much more. In contrast, if you can convince a hard money lender to take a deal, there’s nothing stopping them from accepting it.

• Low/No Credit/Net Worth Requirements: If you or one of the key principles has poor credit, a hard money loan could be the perfect solution. As we mentioned, hard money lenders provide asset-based loans, meaning that they are focusing on the value of the collateral asset rather than the characteristics of the borrower. If your credit is sub-600, a hard money loan may be your only option if you want to finance a property without a creditworthy sponsor. The same goes for net worth requirements, as a borrower’s net worth is generally not a salient factor in getting approved for hard money financing.

• Fast Closings: Hard money loans can close in as little as 24 hours, faster than most other types of financing. For example, bank and agency loans typically require a minimum of 45 days to close, with many loans taking much longer. HUD multifamily loans, for instance, often take 6-12+ months to close.

• Background Checks/Legal Issues: If you have a criminal record, or are even in pending business litigation, it could impact your ability to get a loan from a bank or an agency. However, much like low credit scores, many hard money lenders will be willing to look the other way if you have some kind of blemish on your record.

• Available for Distressed Properties: While banks, CMBS, and agency lenders may balk at lending you money to rehab a run-down or highly distressed apartment or commercial property, many hard money lenders will be willing to work with you.

• Interest-Only Options: In many cases, a hard money lender will provide an interest-only (I/O) loan, particularly in the case of rehab or deep value-add deals. This is a form of a balloon loan, in which the borrower will pay all interest (and sometimes certain fees) in one lump sum. This generally occurs once the borrower has either sold or refinanced the subject property.

The Cons of Hard Money Loans:

• Higher Interest Rates: Hard money loans can be expensive, with some lenders charging interest rates up to 20%. This can cut into investor profits even if an investor is highly skilled and perfectly execute their investment plan.

• High Origination Fees: While they may not require as many third-party reports as HUD, agency, or bank loans, hard money lenders can often charge high origination fees, sometimes between 3-5%.

• Shorter terms: Hard money financing is typically provided at terms of 6-18 months, though some loans may be extended for up to 3 years in certain situations. This is significantly less than the average bank or agency loan, which is usually extended for a term of 5 years.

• Higher-risk: Any loan with a higher interest rate and a shorter term will naturally be riskier for the borrower. For this reason, hard money loans should only be used in specific situations. These include when no other type of financing is available to a borrower due to credit or legal issues. As we mentioned earlier, a common use of hard money is to rehab a distressed property and refinance or sell the investment before the loan matures. The borrower will then use the sales or loan proceeds to pay back their hard money lender, leaving them free and clear of the loan. In this capacity, hard money loans can be considered a type of bridge financing (bridge loan).

• Full-recourse: Loans are full-recourse, unlike non-recourse CMBS, Fannie Mae multifamily, Freddie Mac multifamily, and HUD multifamily loans.

• Prepayment Penalties: Just because you’re paying a sky-high interest rate doesn’t mean that you’re off the hook if you want to prepay your hard money loan. Lenders will generally charge 1-3% as a penalty for paying off your loan early, though this varies and can generally be negotiated.

Hard Money Loan Requirements and No Doc Hard Money Loans

Now that we’ve discussed the pros and cons of hard money loans, let’s look a bit at the requirements. Most hard money lenders require a DSCR of at least 1.25x for non-rehab or construction properties. Fix and flip loans for properties undergoing rehab or hard money loans for construction projects (which generate no income until they are complete) will have different DSCR requirements. Sometimes, a hard money loan issued only upon a property’s DSCR is referred to as a “DSCR loan.”

While it’s true that most hard money loans are considered “no-doc” or “low-doc” loans, this doesn’t mean that no documentation will be required, just that the little to no borrower information is required. Since these loans are a form of asset-based lending, hard money lenders generally want to see at least some information about the property and its current profitability.

For multifamily properties, the following documentation may (or may not) be required:

• Last 3-Years Operating Statements (P&L)

• Trailing 12 Month (TTM), and Month-by-Month P&L

• Current Rent Roll

• Summary of Capex to Date

• Stabilized Budget

• Property Details

  • Property photos

  • Address

  • Description

  • Unit-Mix

  • Age

  • Construction Type

In contrast to multifamily properties, single-family properties will generally require far less documentation, since there is just a single P&L statement rather than a rent roll for multiple tenants.

Hard Money Loans and Preferred Equity Conversions

In rare situations, hard money financing can be structured as preferred equity, or as a preferred equity conversion. This means that the lender has the right to seize the property if the borrower fails to pay back the required loan amount while avoiding typical foreclosure proceedings. This can save both the lender and the borrower significant money, time, and headaches if the deal goes downhill.

Refinancing Hard Money Loans

If you purchase a multifamily or commercial property with a hard money loan and want to hold onto it for the long term, you’ll likely want to improve the property’s financials and refinance your hard money loan into a loan product with better rates and terms. Unlike hard money financing, getting approved for a non-hard money loan typically requires more documentation, including:

• Personal Financial Statement (PFS)

• Schedule of Real Estate Owned (SREO)

• Resume/Bio

• Organizational Chart

Just as for hard money loans, documentation regarding the property itself, including T12 (trailing twelve months) financial statements, rent roll, other operating statements, and the like, will also be required.

For multifamily properties, non-recourse Fannie Mae and Freddie Mac multifamily loans are ideal choices, though they can be hard to qualify for. In terms of Fannie Mae, Fannie Mae’s popular DUS program is ideal for properties over $6 million.

For small apartment properties, Fannie Mae’s Small Loan Program allows loans between $750,000 and $6 million, while the Freddie Mac Small Balance Loan (SBL) program is ideal for properties between $1 million and $7.5 million, particularly in larger markets.

If a borrower’s credit or legal issues are cleared up (or a more creditworthy sponsor has entered the deal), non-recourse CMBS loans, which start at $2 million, may be ideal. Like hard money, CMBS is available for all commercial property types, including retail, industrial, office, and more, though is not available for single-family rentals (SFRs).

In rarer cases, a borrower who may not qualify for bank, agency, or CMBS financing may want to refinance with another hard money loan. Since hard money loans vary so greatly in terms of interest rates and terms, hard money-to-hard money refinancing can still make sense in some situations. For instance, if a borrower currently has a hard money loan with a 15% interest rate, refinancing down to a similar loan with a 10% interest rate could make a huge difference for a property’s financials.

Agency, CMBS, and HUD Multifamily Loan Terms for Refinancing Hard Money Loans

Hard money loans can be refinanced in a variety of ways. If you have a higher net worth and are dealing with a higher-quality property, Fannie, Freddie, or HUD 223(f) loans can be a great choice, while a CMBS loan can be a better option if your net worth is less than 100% of your requested loan amount.

Terms for Fannie, Freddie, HUD multifamily, and CMBS loans include:

• Minimum Loan Amount:

  • Fannie Mae: $750k+

  • Freddie Mac: $1 million+

  • CMBS: $1 million+

  • HUD: $1 million+

• LTV:

  • Fannie Mae: 80%

  • Freddie Mac: 80%

  • CMBS: 75%-80%

  • HUD: 85%+

• Terms:

  • Fannie Mae: Up to 30 years, fixed or floating

  • Freddie Mac: Up to 20 years, fixed or floating

  • CMBS: Up to 10 years, fixed

  • HUD: Up to 35-40 years fixed-rate

• Amortizations:

  • Fannie Mae: Up to 30 years

  • Freddie Mac: Up to 25 years

  • CMBS: Up to 25 years

  • HUD: Up to 35-40 years fixed-rate, fully-amortizing

• Recourse: Non-recourse

• Rates: Highly-competitive

Hard Money Construction Loans

Construction loans are the riskiest type of loans for lenders, as there are a wide variety of things that can go wrong during the construction process. Unless you can qualify for bank financing, getting a hard money multifamily construction loan may be your only option when it comes to building a multifamily or commercial property. Hard money loans can be ideal for some construction and substantial rehab situations, particularly since they offer I/O (interest-only) options.

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