Hard Money Loans

Hard money loans are used to generate huge amounts for short durations on non standard properties as collateral. An emergency loan on a property under foreclosure can be used to renovate the same and increase its value. A short term loan running into a few hundred thousand dollars can help overcome the foreclosure and secure a better sale price. This will obviously lead to huge profits for the lender who accepts the high risk. Such a loan is classified as a hard money loan.

Features of Hard Money Loans

The primary characteristics of hard money loans include

  1. Loan on immoveable property
  2. The security offered does not qualify as safe collateral.
  3. Borrower promises to repay the amount owed within a specific period or hand property over to the lender after failing to do so. The lender has the first lien on the property.
  4. Higher than sub prime interest rate is charged for hard money loans
  5. Approval is a lot faster than traditional loans as very little weightage is attached to the credit score of the individual.
  6. The potential increase in value of property after renovation and improvement is the most important factor affecting loan approval.
  7. Different from bridge loans as the property offered as collateral suffers from a defect which must be removed before it can be disposed off, eg – an existing mortgage.

Factors Affecting Approval Of Hard Money Loans

  1. Loan To Market Value

Hard money loan providers are usually adept in developing and renovating immoveable property on their own. Unlike banks, they know how to extract maximum value out of the asset in consideration. Hence, the value of loan and its approval depends on the loan to market value ratio. A ratio of 0.5 means lenders can earn a huge profit in event of default. A ratio of 1.5 significantly increases risks and this will affect interest rates.

  1. Interest Rates

Hard money loans are high interest loans and may be available even when traditional lenders are playing it safe. The recent real estate slump has affect ability of lenders to take risks. This is why lenders are prepared to compromise on loan to market value ratio and are charging higher interest rates instead. 

Hard money loans are based on value of property and are available even when foreclosure is imminent or has taken place. On the flip side, borrower may end up transferring ownership of property to the lender in event of non repayment. Full repayment involves payment of very high interest.