Hard Money Mortgage Loans

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.

What are 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.

Features of Hard Money Mortgage Loans

  • The borrowers of these loans often have a bad credit history.  So the chances of them defaulting on these loans are quite high.  The lender tries to protect himself against this risk by charging a higher rate of interest.
  • The installments for the first few years generally consist of only interest payments.  At the end of the predetermined period, the borrower is required to pay the principle in a lump sum.
  • The lenders of these loans charge points on the loan taken.  Points are nothing but prepaid interest.  So the borrower has to pay a certain portion of the interest upfront.
  • These loans are approved within a very short time of applying and are very useful to people who want to prevent foreclosure.  The borrower needs the cash immediately and traditional loans would take ages to clear.
  • The loan to value ratio is generally low.

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.

  • The lender would like to have first lien on the mortgaged property.  This means that if the borrower were to default on payment, the lender should be the first creditor to be paid.  So the lender of a hard money mortgage loan would want previous mortgages to be cleared so that he has first lien status.

Commercial Hard Money Mortgage Loans

When a loan is taken to save commercial real estate which has been mortgaged, it is called a commercial hard money mortgage loan.

Advantages of Hard Money Mortgage Loans

  • These loans are very helpful to people who want to save their property from foreclosure.
  • Hard money mortgage loans are approved quickly and disbursal of cash is immediate.
  • Getting loans approved is very difficult for people with a bad credit history.  However, the lender of a hard money mortgage loan overlooks the borrower’s credit history.

Drawbacks

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.