Is It Possible to Self-Amortize Hard Money Loans?


There is a lot about hard money that differentiates it from traditional financing. For instance, hard money lenders do not amortize. They don’t write a loan and establish a monthly payment schedule to ensure they get their money. They leave it to the borrower to come up with, and execute, a proper exit strategy. One option is the self-amortize.

Exit strategies are important to hard money lenders. A lender like Salt Lake City’s Actium Partners will take a close look at the borrower’s exit strategy to assess how realistic it is. An unrealistic strategy may put too much risk in the lender’s lap. That is a recipe for loan rejection.

So what about self-amortization? Is it possible in the hard money arena? And if so, what do borrowers need to do to convince lenders that such a strategy will work?

1.            Self-Amortization Explained

Self-amortization should be simple enough to understand. Rather than hoping and praying the money will be there at maturity, a borrower commits to making monthly payments on the loan. Those payments can be sent directly to the lender or put into a separate bank account for full repayment later. In either case, the borrower assumes the responsibility of paying monthly.

Figuring out how much to pay is simple math. You add up the principal, interest, and any fees associated with the loan. Then divide the total by the number of months until maturity. That’s how much is paid each month. Then it is just a matter of sticking to the plan.

2.            What Lenders Want to See

No exit strategy is reasonable if the borrower lacks credible evidence of being able to make good on it. So let’s say a borrower’s exit strategy is to secure traditional financing. If he has tried every avenue of traditional financing and failed, is there reason to believe he won’t be able to get the financing to complete his exit strategy? Lenders have to seriously consider the possibility.

Likewise, an exit strategy of self-amortization requires the borrower to have sufficient monthly income to cover payments. In the case of real estate investor who is purchasing an apartment building, the lender might want to know if the building generates enough monthly income to cover the promised payments.

In essence, a lender has to see evidence of sufficient income from any borrower whose exit strategy is self-amortization. Being unable to prove sufficient resources to make monthly payments will make it much harder for the lender to agree to self-amortization.

3.            There Are Other Options

Self-amortization is not the only exit strategy option. There are many others. For example, that same property investor looking to buy an apartment building might have other assets he is willing to part with. He could develop an exit strategy that involves selling one or more properties he is no longer interested in keeping. The value of said properties should be enough to satisfy the lender.

Whether the borrower chooses to self-amortize or sell additional assets, it is in his best interests to provide as much evidence as possible showing the ability to repay. And of course, loan approval will hinge heavily on the combination of exit strategy and collateral value. Strength on both counts works in the borrower’s favor.

Yes, it’s entirely possible to use self-amortization as an exit strategy for borrowing hard money. Lenders are more than happy to okay it if the evidence is there to prove it will work. In the end, lenders are most interested in being repaid without having to take possession of collateral. Self-amortization is a workable strategy as long as it gets the job done.

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