Imagine a situation where you are unable to pay your house mortgage. There is every chance that the loan will be foreclosed, that is, you will lose ownership of the house and the lender can sell it to recover his money. You want to prevent this at all costs. Is there any way out? You can apply for another loan but it may not be approved and even if it is, the process will take some time. The solution - apply for hard money mortgage loans.
A hard money mortgage loan is a loan granted when a borrower’s mortgaged property is on the verge of foreclosure, but he still has some equity in the property. These loans are not granted by banks or prominent financial institutions. Private lenders issue these loans to property owners who are desperately trying to save their mortgaged property.
Loan to value ratio = Mortgage Amount : Appraised value of property
However, in the case of hard money mortgage loans, the properties are not valued in the usual manner. Instead, the price at which one could sell the property today or ‘today’s price’ is considered. The loan amount may be as low as 60% of that price. This is another way by which the lender safeguards himself from risk of loss.
When a loan is taken to save commercial real estate which has been mortgaged, it is called a commercial hard money mortgage loan.
Many unscrupulous lenders try to take advantage of the borrower’s desperation. Not only are the interest rates high, some lenders also charge exorbitant upfront fees. Points are also levied which means that the borrower will be required to pay prepaid interest. In addition, the lender may also charge a penalty for default. Often, he places these outrageous terms to make foreclosure easy. But these predatory lending practices exploit the borrower to the hilt and borrowers should be wary of such lenders.
All said and done, hard money mortgage loans are like a godsend to people with a bad credit history who have no other means of saving their property from foreclosure.