Definition of Lending Hard Money
Hard-money lending involves the mortgage of property under circumstances where the borrower does not meet the requirements of prime lending. Sometimes referred to as "asset based" lending, hard-money lending places more weight on the quantity and quality of the real estate than the borrower's ability to repay the loan. Since hard-money loans are considered to be higher risk to the lender, the interest rate will be much higher than loans where the income is fully documented and credit meets prime lending guidelines.
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Who Uses Hard-Money Lending?
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Hard-money loans are sometimes used for borrowers under stressful conditions. The borrower may be in default on mortgage payments, or on the verge of foreclosure. The hard-money lender will "bail out" the borrower from his financial woes, and give him a temporary solution for his problems. This assistance may be all that is needed to put a business owner back on his feet. He may be able to refinance the loan in a couple of years. Hard-money lenders can also act as a bridge for a person who may be buying a commercial property that is in need of fix-up or has no occupants. This type of financing will approve what no bank will touch, giving the buyer funds to buy and repair the property. He can then refinance later when it is producing income.
How Lenders Make Hard-Money Loans
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When lending "hard money," the lender will protect her interest by limiting the loan amount from 50 to 70 percent of the appraised value of the property. She does this as a protective measure in case the borrower defaults on the loan. If the marketing time to resell the property is longer than expected, the lender still gets a good return on her investment due to the low loan-to-value percentage used. Since hard money loans are considered to be high risk, the interest rates on this type of loan are high (from 13 to 20 percent), as are the closing fees charged. The loan will sometimes be short term, but will be "balloon," or be due in full, after 2 to 5 years. Lenders are able to approve hard money loans rapidly, so the closing can happen within a few days.
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Types of Properties
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The type of properties most preferred in hard-money lending are commercial and residential properties that produce income (rentals). Commercial properties include shopping centers, office buildings or individual single-use buildings. Residential properties include mobile home parks or single and multifamily rental homes. An owner-occupied property may be financed by a hard-money loan, but since it does not produce income, the preference is in commercial and rentals.
Who Are Hard-Money Lenders?
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Hard-money lenders are never a local bank. They will be private lenders who are in the business of investing in real estate. They may be a division of a large commercial bank, a private source, or a real estate investment trust.
Advantages of Hard-Money Lending
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The biggest advantage of hard-money lending is the speed in which they can be closed. Normal bank loans will take 45 days. Commercial loans can take even longer. The type of borrower who is seeking a hard-money loan probably would not be a candidate for a bank loan due to either his financial condition or the condition of the property.
Disadvantages of Hard-Money Loans
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The list of disadvantages for hard money lending is pretty long. They are costly to get and high interest to keep. They can solve a problem quickly, but you want to exit them as fast as possible. Be careful to make all of the required payments on time as there may not be a grace period on payments. Foreclosures happen faster with this type of loan. For anyone getting a hard-money loan, use the money from the loan wisely. Rehab the property to get paying tenants in it. Rebuild credit if needed so you will be able to refinance with a better mortgage in as short a time as you can. Ask about prepayment penalties. Have an exit plan in mind, and expedite it.
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