Typical home loans are financed by banks or bank subsidiaries and carry fees and interest rates close to national averages using the prime rate. Subprime home loans carry higher fees and interest rates so that lenders can mitigate risk. Hard money loans are similar to home loans, but since creditworthiness rarely figures into the credit extension equation, the only asset the lender has is the property itself. These loans are sometimes called "bridge loans" and should be used only in desperate times.
Lenders
Almost no nationally or state recognized mortgage lender participates in hard-money lending. The practice is just far too risky. Hard money lenders are private investors who are real estate savvy and have a penchant for risk. Most of these lenders seek hefty profit and are well-capitalized. They are sometimes former mortgage brokers or Wall Street traders and have an acute sense of real estate market trends.
How Hard Money Works
Most borrowers looking for hard money loans are in dire financial straits. Sometimes they're about to be foreclosed on, other times they're seriously delinquent on other secured loans or they need quick influxes of cash to keep businesses afloat. Private hard money lenders review a potential borrower's property, not their credit, and calculate whether or not they could profit from the sale of said property if the hard money borrower defaults on the loan.
Fees, Interest and Rates
It isn't uncommon to see hard money secured loan rates as high as 14 percent to 16 percent. These lenders normally charge the state or federal maximum for origination; in some states, that's 5 percent of the loan amount. The goal of a hard money lender is to profit no matter the outcome of the loan. In order to achieve this, they need to charge heavy fees upfront and have guarantees that, in the event of foreclosure, a property would sell for a profit on the open market.
Uses
Many borrowers use short-term hard money loans to escape perilous financial situations. For example, if a business owner is struggling to meet his or her payroll in a particular pay period, he or she could mortgage a piece of property with a hard money loan and then pay it back when revenue pours in again. Other borrowers use these loans to avoid foreclosure on their standard, conventional mortgages.
Warning
Hard money loans aren't for the faint of heart. The fees and interest alone are enough to scare away even the most seasoned subprime borrowers. In addition, borrowers must be aware that hard money lenders are never looking out for their borrowers' interests. Last, hard money scams are more and more prevalent. It's important for any borrower looking for a hard money loan to carefully scrutinize any offer with a trusted attorney.
