Hard Money Real Estate Loans  

The Foreclosure Help Few People Know About

If you absolutely do not qualify for a loan modification, hard money real estate loans may be the foreclosure help you need in order to save your home, especially if you have a good amount of equity in your property.  In a situation such as foreclosure, hard money comes in as a short-term solution in order to stop foreclosure and allow you to do what you need to do with your home and salvage the equity you have in it.

Hard Money Definition

Hard money real estate loans are asset-based loans secured by real property.  These loans are known to be funded at higher interest rates than conventional bank loans, and they are also much more expensive.  The reason for high costs and fees is the higher risk that the hard money lender takes when extending these loans.  They are available as residential hard money loan as well as commercial hard money loans.

Hard money loans are also sometimes called private money loans.  Private in a sense that they are funded by private investors instead of banking institutions. Private money investors could be individuals, a trust, hedge fund, or a private mortgage fund or "mortgage pool" with multiple private investors owning shares.  They are not depository institutions like banks and savings and loans companies.

Hard money loans are also commonly known as "last resort" loans if a borrower is in financial trouble and foreclosure is imminent.  It will only work, however, if the collateral or subject property meets the equity requirements as well as the risk/reward assessment set by the lender.

Why get a loan from a Hard Money Lender?

There are times when a hard money loan is the best solution for your particular situation.  There are several circumstances where this type of loan could either save your home or property, or secure a real estate transaction.  
  • Foreclosure - If you are behind on your payments and a foreclosure is looming in the horizon, AND you have enough equity in your home or property, you can secure a residential hard money loan to resolve your situation.  It is extremely rare that a conventional bank will extend a loan to you if you are several months behind or if the foreclosure process has started on your property.  With a tarnished credit history, you are no longer deemed creditworthy by traditional banks.
  • Speed - Hard money lenders are known to make decisions faster than a conventional bank.  Often times, hard money real estate loans are  funded within 7-10 business days if all requirements are met.  This is especially crucial if you need to stop a foreclosure immediately, or if you need to secure a real estate deal stat!
  • Less Paperwork - Unlike a fully documented loan or even a "low doc" loan, hard money loans require much less paperwork.  Most hard money lenders only require four (4) items:  loan application, appraisal, preliminary title report, and credit report (your credit score does not determine approval of your loan, but hard money lenders require it so they can see what other liabilities you may have).
  • Interest Only Payments - Hard money real estate loans are mostly offered with interest only payments.  This gives you a lower monthly payment amount than if the loan were fully amortized.  Just be aware that these types of loans are meant to be temporary solutions and even with interest only payments, the interest rates and closing costs and fees are still much higher than a conventional bank loan.
Note:  Hard money loans, more often than not, come with a shorter loan term, ballooning anywhere from 12 months to 5 years.  In addition, they may also come with a prepayment penalty of anywhere from 6-12 months.   Make sure you negotiate a realistic time frame where you are able to pay back the loan or refinance out of it.  

Hard Money Borrowers  

  1. Borrowers with Low Credit Scores - More often than not, borrowers of hard money loans have poor credit and are not able to meet the credit score requirements of conventional lending institutions such as banks. They have no choice but to pay the higher rates and higher costs and fees of a hard money lender. 
  2. Real Estate Developers and Real Estate Investors - Other types of hard money loan borrowers include those who need to close a real estate deal very quickly and do not have time to go through a conventional bank's beaurocracy and lengthy paperwork to close a loan.  They would much rather pay the higher interest rate, costs, and fees from a hard money lender in order to secure a lucrative deal.  They see the high costs of the loan as a small percentage of their potential profit and therefore decide that the high cost is worth it.
  3. Borrowers in Financial Trouble - Borrowers who find themselves in a financial bind have problems getting approved by conventional lenders who lend based on the borrower's credit worthiness and personal financial health.  These borrowers often times look to hard money real estate loans as a great alternative especially if their property has a good amount of equity.   Often times, this is the only type of loan they can get approved for.  Hard money real estate loans are often used to stop a foreclosure.  

Hard Money Lenders

Hard Money lenders are investors who are willing to lend to "higher risk" borrowers in return for the nice stream of income from the high interest payments.
  • Individuals - Most individual hard money lenders rely on a hard money broker or agent to bring them loans that have already been underwritten.  They are not known to advertise for hard money loans.  They let their broker find the loans and package them up to fulfill all their requirements.  They are comfortable and experienced with trust deed investing but would rather have an agent generate all the paperwork and communicate with the borrower.
  • Private Mortgage Funds or Mortgage Pools - Hard money lenders often times create a fund or a mortgage pool that aggregates individual investors' moneys to fund loans backed by real estate.  If you call one of these lenders, there may be a loan committee who issues approval for your loan based on the fund's underwriting guidelines.  

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