Commercial Mortgage Loans, Conventional Vs Hard Money

Property owners, investors and developers have choices when it comes to commercial mortgage loans. National and regional banks, Wall Street firms and all major insurance companies offer, fully underwritten, full documentation conventional mortgage loans.
Wealthy individual investors and privately owned lenders offer a wide variety of private, often called hard money, commercial mortgage platforms.Both private and institutional loans have their place; each offers separate benefits and each have their own drawbacks.TransparencyFederally chartered banks, public Wall Street investment houses, finance arms of public corporations and insurance companies are all highly regulated and have strict disclosure and reporting standards. It’s easy to know when you’re dealing with a legitimate firm. All the companies’ financials and business information is public and easily accessed by borrowers wishing to check them out.Private mortgage lenders, on-the-other-hand, are, by definition, private; it’s often difficult to check them out and confirm their claims. It is imperative that borrowers make sure they are dealing with a bonafide lender with a reputation for funding deals. This can be accomplished by using the services of a professional commercial mortgage broker or intermediary. A good loan agent knows who’s for real and who’s not. They don’t get paid on loans that don’t fund so they won’t waste time submitting files to questionable lenders.SpeedConventional loans are made by regulated institutions and will require full documentation and adherence to strict underwriting parameters. The process takes time, especially if a borrower is trying to take advantage of a Government loan guarantee, such as those offered by the Small Business Administration (SBA) or the Veterans Administration (VA). Institutionally funded conventional loans typically take 30-60 days to close. Loans affiliated with Government Agencies (SBA) have more requirements and take between 60-180 days to complete.Private commercial loans can close at lightning speed. There are no restrictions or special regulations on hard money commercial lending (residential hard money lenders must adhere to all state and federal mortgage lending rules). Loans can close in as-little as 3 days, but 14-21 days is normal.Rates and TermsConventional lenders compete with each other on rates and terms and the banks and financial firms that issue them are extremely well capitalized. The interest rates, points and the variety of mortgage platforms offered can’t be beat by private funding sources, which, by their nature have limited funding capacity. When banks loan out money they have many methods of recapitalizing. They can sell the loans to one of many outlets and they can, of course borrow against the loans. Banks offer low rates and attractive terms because they can originate a seemingly unlimited amount of mortgages. They make a little money on a-lot of loans. It’s the sheer volume and the continuous movement of funds that keeps them swimming in profits.Private lenders often “portfolio” or hold their loans. Their source of profit is the interest and points they charge borrowers. They have target yields they strive to achieve and would rather not make a deal than make a deal that puts their capital at risk without the corresponding yield benefit they desire. Rates and origination points will be significantly higher and product offerings significantly limited when dealing with a private funding source.Conventional vs. PrivateIf you have the time and if you can qualify, it makes economic sense to use a bank or large financial firm. You will have more choices as-to the structure of your financing and you will secure superior rates and terms.If time is of the essence or you can’t provide full documentation or have poor credit. You may have to go with a private lender. It will cost more in absolute terms but will be cheap when compared to not getting a loan at all.