A hard money loan is an asset-based loan with a high interest rate that usually serves as a short-term source of financing for borrowers who can’t qualify for a mortgage with a typical bank or mortgage lender. Many associate this type of loan with a bridge loan because it’s often a quick-fix loan that serves to fill a gap in financing. Hard money loans are a step below subprime offerings, and often the last possible way of securing financing.
Hard Money Loans Are Often a Last Resort
Hard money loans are typically the last resort for borrowers who simply can’t find financing due to poor credit profiles, unverifiable income and/or assets, unique properties, and so on. In distressed situations such as bankruptcy or foreclosures proceedings, hard money loans may be used as the one and only solution to avoid a complete loss. Most hard money lenders will allow open NODs, charge-offs, notice of sale, bankruptcies, and more.
Hard money lenders use the value of the home “if sold today” as collateral for the loan, and often assume the first-lien position which ensures they get paid first in the case of a default. In the past hard money lenders would allow high loan-to-values, but after getting burned in the 1980s and 1990s, many only offer loan-to-values between 60-80%.
Hard money lenders usually take a more conservative value approach than the standard appraised value larger banks and lenders rely upon. The liquidity of the property is especially important to hard money lenders in the event of a default, which is much more common with hard money loans than bank issued loans.
Hard Money Interest Rates Can Be Pretty High
When hard money lenders determine interest rates, they use the value of the home as the basis, not the bank rate many lenders use. Interest rates can range between 10-20%, and up to 25-30% if the borrower defaults on the hard money loan. The cap is typically as high as the law allows, and can vary by state. Hard money lenders typically charge a large amount of points as well, usually ranging between 4 to 8 origination points on a loan. While this may seem like predatory lending, it is often in the best interest of the homeowner as it provides a solution to avoid losing equity in their home if forced to execute a quick-sale.
Most hard money loans are structured as balloon payments due 1 to 2 years after the loan is issued. Some even offer flexible payments such as an interest-only option. And many of them offer generous approval terms such as “1 credit score OK”, no asset or income verification, and no verification of employment.
Be sure you have the money to make your monthly payments or the hard money loan will simply add to your financial woes. These types of loans are really offered as a lifeline, and should be treated as such. If you know you won’t have the money to make the payments, it might be in your best interest to sell the property before incurring greater amounts of debt.
When looking for a hard money lender, prepare to search locally as many of these types of lenders like to see the property they are lending on in person. Nationwide hard money lenders are out there, but may offer more conservative terms than a local company. So if you have a vacation property in Hawaii, you’ll likely need to choose from the hard money lenders in Hawaii. As with any financial transaction, practice extreme caution when dealing with these types of companies, as fraud and predatory lending are rampant in these situations.