A hard money loan is a a real estate loan arranged to meet a particular purpose, Hard money loans have been referred to as a loan of last resort or a short term bridge loan. Hard money loans are issued using real estate as collateral, and generally a hard money loan is secured only by the value of the collateral, and not by the credit-worthiness of the borrower.
Los Angeles Hard money loans normally carry high interest rates, meaning higher even than traditional subprime loans. Because hard money loans are given without consideration of a borrower’s credit, they typically also carry lower loan to value ratios than most real estate loans. Hard money lenders may lend only 55% to 65% of property value. A lender will also require that the borrower have substantial equity in the property to be borrowed against.
Hard money loans are generally short term loans, lasting only a few months until maturity. The loans can last longer, including to between one and three yeas. These loans are commonly sought by investors planning to flip a house, by renovating the house and quickly reselling it. They also may be sought by borrowers facing a financial emergency, with the possibility of foreclosure or bankruptcy. Hard money loans are similar to bridge loans. Both loan types usually are based on the same borrower criteria and carry the same high costs. The difference between a hard money loan and a bridge loan is that whereas hard money loans normally involve financial crises for borrowers, bridge loans are generally given for commercial or investment properties only because they are in transition and will not attract traditional financing.
Hard money lenders are normally not banks or mortgage companies, but private individuals and companies specializing in hard money lending, attracted by the potential profitability of hard money loans, despite the high risk. Hard money loans are also compared to private money loans, where funds come from a private party as lender. The high rate of return on investment capital appeals to the lander, who is willing to assume a higher rate of risk. At the same time, with a real estate loan, there is always the possibility that a lender with a loan in default will foreclose on the collateral and take title to the property to perfect the loan.
Hard money is a term used primarily in the United States and Canada. The hard money loan industry came into being in the late 1950s. Since inception, the hard money industry has for the most part not been regulated by state or federal laws, with the exception of state usury laws. Usury laws are so restrictive in some states, including Tennessee and Arksnsas, that hard money lenders are unable to do business there.
A borrower can get a hard money loan against nearly any real estate property, including residential property, business property, industrial property, and land. Most hard money lenders specialize in particular types of property, and may not entertain loans for other types. Many hard money lenders refuse to lend against owner-occupied property because of increased regulations. Many hard money lenders also will not do loans in 2nd position, but only in 1st position.
Home buyers who do not have credit concerns and can wait on mortgage completion by a bank would not be advised to consider hard money loans. Instead, hard money is the best source of financing when bank financing is not available or a borrower cannot wait on any delay. Hard money loans do serve a useful purpose. They are ideal for situations such as:
- Renovation and resale
- When the Buyer has credit issues
- When a real estate investor must avoid delay
Hard money lenders advertise their services aggressively. A simple Google search for hard money loans will produce pages of search results.