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Bankers are known to be hard wired not to take risks with finances. So, the concept of hard money loans is pretty surprising. Essentially, hard money loan is the financing provided at extremely high risks such as lending in foreclosure, sanctioning loans for an undervalued piece of land or property or refinancing existing mortgages. These lenders can either be small businesses or private individuals and they grant loans on great risk. People who have bad luck and have been turned down by every hard wired banker can approach hard money loaners and obtain financing. For such people, these loans are often the final haven. ?
How do hard money loans work?
Agents and brokers make hard money loans possible. They contact people who have the resources to lend money and those who require money but are unable to find a route to obtain finance. Agents and brokers bring these two parties together. Usually, these loans come with high interest rates. Loans are obtained more easily if perceived risk is not very high.
There is often a misunderstanding about hard money lenders. Since they offer loans at no guarantee, to people who are turned down by others and at high interest rates, they are perceived as loans sharks or part of the Mob. They are actually not, neither are they your conventional bankers. Hard money lenders offer loans at extremely high rate of interest and high fees. The main factor that decides interest rates and fees is equity available on your home so that in case you fail to repay, they can foreclose your home and get their money back as well as make some profits. Although there is a dark side to this kind of loan, it is often the last resort for people who cannot find funding from any other source. What is more, the loan amount can range between $70,000 and $500,000.
Hard money lenders finance home constructions in remote locations as well, which is something that a conventional bank or lending body never does. Funding can also be obtained for building unconventional structures such as cabins. These kinds of loans are used by both rural and urban people. Rural buyers find it tough to borrow from conventional lenders because land value is lower in countryside areas.
Hard money loans are extensively used by real estate investors. These people find it more convenient to borrow hard money, buy cheap property, renovate it and sell it at higher costs. Conventional lenders usually do not lend for these purposes. Hard money is also useful for those who wish to buy expensive property and people who own expensive property and want to cash out the equity on their property through refinancing loans. When borrowed from this unconventional source, loan is acquired more easily and there is lot less paperwork and red tape. Terms and conditions of loans are also simpler.
Maximum percentage of people who resort to hard money loans are people who face foreclosures. They might be unable to pay their installments for whatever reason such as disability or job loss. So, their loan and interests keep piling up. These people borrow from hard money lenders and update their outstanding loans so as to prevent foreclosures. This gives the borrower more time to either repay loans or sell the property and repay both the conventional loan as well as hard money loan. Borrowers also get adequate time to arrange new residence for themselves.
Essentially, hard money loans are taken for a temporary period or short term relief. They help people out of a severe financial crisis and in doing so, they cover the gap in conventional banking system in which a person who if desperately in need of quick money cannot obtain funding.
So, hard money loans are very beneficial in several circumstances. However, they come at a very high price. There are several aspects that go against these loans. The biggest hurdle is to find a lender. A lender usually lends hard money for investment in areas that are close to his operational area so that he can easily access those places. The best way to begin looking for a lender is to contact as many agents and brokers as you can find. Ads and notifications are also posted in local newspapers and classifieds.
The terms and conditions might be very different from those of conventional loans. So, you should be prepared for a lot of compromise. Interest rates are above 10 percent and you have to pay several kinds of fees upfront. In order to be eligible, you should be at least 30 percent owner of the house in case your home is mortgaged. The focus of these lenders is to make a profit on the loan they give. So, loan-to-value ratio is an important criterion. Finally, some unscrupulous lenders intentionally create loan structures that you cannot repay, in which case, you end up losing your home. As a borrower, you should be smart.?
http://banking.about.com/od/hardmoney/a/hardmoney.htm
The bottom line of hard money loans
Whatever be the drawbacks, you cannot deny the fact that these loans help people out of a lot of tricky situations. If the borrower is smart and stays away from unscrupulous lenders, he gets a new lifeline on which he can build his life once more.? Critics of hard money loans argue that a borrower could always sell the mortgaged property and be free of the outstanding loans. However, it is always a better option to try and save the home rather than sell it and lose it forever.
Some facts and figures of hard money loans
The actual costs of hard money loans cannot be determined because terms change from one lender to another and from one borrower to another. Rates of interest can vary between 12 percent and 18 percent. Loans are offered only for first mortgages and not for the second one. Balloon payment is due after a couple of years at the most. Loan to value ratio can be 50 to 70 percent.? These loans are flexible. In case you have trouble paying, you can contact the lender and request for a restructuring, which can almost always be done, as long as the lender does not have dark intentions.
http://homeguides.sfgate.com/ask-loan-hard-money-lender-7099.html
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Source: http://www.edustudentloans.com/hard-money-loans/
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