Hard Money Loans
A hard money loan is one where the lender grants a loan not on the basis of the borrower’s credit history, but on the value of the real estate in which the borrower has considerable equity.
What are 100% Hard Money Loans?
First of all, what do 100% hard money loans mean? A 100% hard money loan is one where the lender sanctions a hard money loan amount equivalent to the value of the real estate owned by the borrower. Though all hard money loan borrowers would want 100% hard money loans, no lender grants them. Even banks do not provide 100% financing for normal real estate loans. Hard money loans are lent by private individuals and surely they would never provide 100% hard money loans.
When do people apply for Hard Money Loans?
A person who has taken a mortgage may miss paying a few installments. The lender would then initiate foreclosure proceedings. The mortgagor would want to prevent this but is helpless as he is unable to arrange for immediate money. Even subprime lenders who generally grant risky loans are unwilling to help him out. Hard money loans then are the only choice he has. In fact, he would prefer 100% hard money loans, but no lender would grant that.
However, he would be able to get a loan from the hard money loan lender and he could use the money to pay off the previous mortgage. He would then get some time to make arrangements for repaying the hard money loan.
Features of Hard Money Loans
- The loan to value ratio of hard money loans is very low. Though borrowers hope for 100% hard money loans, in practice the loan granted is as low as 65% of the property value. This is because the lender wants to ensure that he does not lose any money in the event of foreclosure.
- As the risk borne by the lenders is high, the interest rates of hard money loans are very high, sometimes as high as 18%.
- Another notable characteristic of these loans is that they involve balloon payment – the installments cover the interest payment and the principle is paid in a lump sum at the end.
- Hard money loans are granted very quickly, usually within four days of application. This is because there is no red tape involved. Credit history of the borrower is not analyzed either. On the other hand, real estate loans granted by banks and financial institutions take a long time to be approved.
- The hard money loan money is generally taken to repay a previous mortgage. So the lender is actually underwriting the first mortgage loan taken by the borrower.
Drawbacks of Hard Money Loans
- Though borrowers would like 100% hard money loans, the loan value ratio is low and they generally manage to get only 65% of the value of the property as loan.
- People cannot avail of hard money loans if they do not own a significant part of the real estate which they wish to mortgage.
- The loan terms are quite unfavorable. The interest rates are high; points are levied, so some of the interest has to be prepaid. Balloon payments are the norm and the borrower may find it difficult to make one lump sum payment at the end of the loan term.
- Many hard money loan lenders are unscrupulous and follow predatory lending practices. They structure these loans in such a way that makes it almost impossible for the borrower to repay them. The aim is to force a foreclosure so that the lender can take possession of the property. Borrowers are either unaware of this or take these loans in spite of being aware of this exploitation as they desperately need the money.
Hard money loans however, are the only lifeline available to people who may lose possession of their property in case of foreclosure. Though 100% hard money loans are not available, the loan money sanctioned is of great help to the borrower as he can repay his earlier mortgage and retain his property.