Hard Money Loans Explained
Hard money loans are private loans made to individuals with less than perfect credit. Hard money loans can be funded much more quickly than normal home loans, as they go through private fund sources instead of traditional lending institutions. They are less common than institutional loans -- making hard money loans a niche within the mortgage lender field. However, they do carry much higher interest rates, often somewhere in the 10%-15% range.
Hard Money Lenders
These bad credit loans are made by hard money lenders, who deal with borrowers with troubled finances and decide whether they can reasonably make and recoup their loans. Because the borrowers are "risky," the loans carry higher than normal interest rates. Hard money loans are often used for foreclosed properties or to individuals with low fico scores or poor credit history.
Hard Money Loan Rates
Interest rates on these loans are often 10% to 15% per year, plus 4 to 8 points up front. While these rates are certainly higher than home mortgage loans, the reason is that the lender takes a big risk as well. Most reputable hard money lenders do not want the borrowers to default on their loans. In the event that a borrower does default, the lender can fall back on the equity in the home to recoup some or all of their investment.
Why Borrowers Take On These Loans
Hard money loans are often the final option for many borrowers. It is one reason why these lenders are referred to as last resort lenders. If the borrowers wants to hold on to the property because they know it's a good investment or don't want to lose their equity, they have little choice but to go the hard money route. Borrowers can be homeowners or real estate investors who turn to private money loans as a quick, albeit expensive, loan option.
The final type of borrower is anyone facing foreclosure. The foreclosure process is typically started by the original lender when a borrower misses 2 to 3 consecutive loan payments. At this point, a borrower faces such a difficult uphill climb that even subprime loans are too risky and the borrower has very limited options. Hard money loans can release the borrower from their original debt obligation and provide some breathing room
Hard money loans are still difficult to qualify for. Many lenders only lend in areas they are familiar with, so borrowers in remote areas may have very limited funding sources.
Beware Of Deals Too Good To Be True
There are unscrupulous lenders out there and borrowers need to be aware of certain practices. Principal among them are loan-to-own lenders, who structure hard money loans in such a way that the borrower cannot make the payments. Once this happens, the lender forecloses on the home, sells it and realizes a profit on the existing equity. Borrowers need to have a clear understanding of the loan terms, restrictions and payments are involved before signing on the dotted line.
Bottom Line Is: Be Smart
Hard money loans obviously carry some risks, however that doesn't mean that they can't be an important first step to eliminating debt and rebuilding your credit score. In addition, hard money loans can help borrowers keep property that has real equity in it. Here is an example: let's say a property is worth $200,000 and the borrower has $100,000 equity in it but has fallen on hard times.
Instead of having the property foreclosed on, they can get a hard money loan at 13% and 4 points but will keep the property. This gives the borrower time to either get into a better financial position or some breathing room to eventually sell the profit, pay off the loan and pocket the remaining equity in the real estate.