Hard Money Loans – Last Resort to Finance your Requirements
Lending to borrowers in foreclosure, helping start-up businesses, financing real estate whose value is hard to fix-these are all risky ventures, and all are beyond most banks policies. But in today’s tough economy, it might pay to take on the risk and help the occasional desperate borrower.
How Do Private Hard Money Loans Work?
A hard money loan is backed by the value of the borrower’s property. This means that the property is worth enough to cover the loan amount plus other costs, such as interest, in case the borrower defaults. This way, lenders can overlook a person’s credit history and financial capacity and extend private hard money loans to anyone with sufficient equity in their home. All they need to know is that they can cash in on the property to recoup their losses if necessary.
Who Needs Private Hard Money Loans?
Private hard money loans work best for people who have no other means of getting financing, either because they have poor credit or need it in a short amount of time. Homeowners at risk of losing their homes are a common example-a hard money loan can allow them to bring the mortgage current and keep their property, provided the home or another of the borrower’s assets has sufficient equity.
Businesses are probably the most common borrowers for private hard money loans. They are commonly used as bridge loans, designed to get projects started immediately while a more conventional plan is under way. Since they don’t go through the usual credit checks, private hard money loans can be approved in a matter of days, rather than several weeks.
How Much Do They Cost?
The catch with private hard money loans is their cost: to compensate for the risk, lenders charge several times as much interest as commercial banks. Rates as high as 18% aren’t uncommon. Also, most lenders set strict limits on late payments. The grace period may not be as long as with regular loans, and penalties can be very high. And since they don’t follow conventional lending processes, they aren’t regulated and may not offer as much consumer protection.
These risks are the reason why private hard money loans are considered a last resort. For some borrowers, they really are the only option, and may even be a good move in terms of building their credit. Before opting for a hard money loan, make sure to weigh the pros and cons and look for possible alternatives, and find the most reliable lenders in your area.
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