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When you hear the words “hard money loan” (or “private money loan”) what’s the first thing that goes through your mind?
In prior years, some bad apples tarnished the hard money lending industry when a few predatory lenders were attempting to “loan-to-own”, providing very risky loans to borrowers using real estate as collateral and intending to foreclose on the properties. Luckily, these types of payday loans Greenfield hard money lenders don’t exist in today’s market, although some residual stigma remains for some real estate investors who haven’t recently utilized the services of a reputable hard money lender.
- What hard money loans are all about.
- The types of properties and deals hard money loans are appropriate for.
- What kind of interest rates and loan to value ratios to expect.
- Standard requirements of the borrower.
- Where to find an experienced hard money lender to work with.
What is a Hard Money Loan?
A hard money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount the hard money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral or it may be the property the borrower is acquiring.
Hard money lenders are primarily concerned with the property’s value rather than the borrower’s credit (although credit is still of some importance to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a hard money loan if they have sufficient equity in the property that is being used as collateral. When the banks say “No”, the hard money lenders can still say “Yes”.
Property Types for Hard Money Loans
A borrower can get a hard money loan on almost any type of property – including single-family residential, multi-family residential, commercial, land, and industrial.
Some hard money lenders may specialize in one specific property type such as residential and not be able to do land loans, simply because they have no experience in this area. Most hard money lenders have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do.
Many hard money lenders will not lend on owner-occupied residential properties due to the extra rules and regulations (thanks Dodd-Frank!) but there are those who are willing to wade through the paperwork with the borrower. All hard money lenders will do loans in 1 st position, while fewer will do 2 nd position due to the increased risk for the lender.
What Types of Deals Should Hard Money Loans Be Used For?
Hard money loans are not appropriate for all deals. When purchasing a primary residence with good credit, income history, and there are no issues such as a short sale or foreclosure, conventional financing through a bank is the best way to go if the borrower still has time to go through the lengthy approval process required by a bank. Hard money is your source of financing when banks are not an option or the loan is needed in a short period of time.