- Hard money is usually only obtainable for short-term financing. Thirty-year mortgages are available from hard-money lenders, but most prefer to refinance after two or three years. Borrowing hard money is very expensive; lenders generally require 50 to 65 percent down or greater than 100 percent loan to value. "Hard-money lenders get enough down that they don't care who you are," says Todd Huettner, president of Huettner Capital in Denver. If you don't pay, the lender takes the property and makes a profit either way.
- Poor credit is only one reason a borrower might seek hard-money loans. While hard money can provide an alternative to a homeowner facing foreclosure, most often it is used to purchase commercial or investment properties. Some hard-money lenders specialize in funding the purchase and rehabilitation of distressed residential property and frequently loan enough to finance the entire project.
- The federal regulations that provide conventional borrowers interest rate and foreclosure rights and protections do not apply to hard-money borrowers. Consumer protection laws protect consumers against predatory lending practices, but the interest rates and upfront costs of hard money are considerably higher than those paid by conventional borrowers. Additionally, with the exception of owner-occupied single family dwellings, foreclosure can occur quickly and without recourse.
- Research potential lenders thoroughly; ask for and contact references. Hard money is expensive, and lenders, who are typically investors, are most concerned about their profit margin. Ensure that you are working with a lender who will be open and honest with you about not only your upfront costs and payments but your options at the end of the loan term. Remember that you have little protection or recourse if you default; therefore, it's crucial you are clear on the terms from the beginning.
- "Make sure you have a very good chance to get conventional financing within the loan term," advises Huettner. Hard-money lenders are usually willing to extend a loan term, but charge several thousand dollars to do so. Inability to secure conventional financing could cost you the property and your investment.
