You’ve probably seen the advertisements: Need a loan? Bad credit okay. No credit check. No proof of income. These types of “ADs” are every where. Or check this one out: Borrow up to $250K – no credit check.
You may ask yourself: how can a person without good credit or sufficient income borrow thousands of dollars?
Well it can happen. Such loans are provided by Hard Money Lenders (HML).
Hard money lenders thrive on desperate people unable to obtain a traditional loan. Hard money lending is a Trillion dollar business!
Traditional banks and other lending institutions provide financing for those who qualify, but hardship such as bad credit, unemployment, a foreclosure, repo, or income deficiency will often leave a person in despair.
This is where Private Hard Money Lenders come in.
Sources for “hard money loans” usually consist of private lenders, insurance companies including private investors who offer funding when a person is unable to get a standard loan.
“We’re thrilled when the banks don’t lend,” said Sam Kohn, in a Wall Street article.
Kohn is owner of California-based National Equity. “There is tremendous opportunity,” Kohn said.
Hard Money Lenders make all kinds of loans, and particularly high on the list are property loans, commercial business loans, loans to investors seeking to purchase and flip houses and businesses, with sufficient equity.
From a revenue perspective, the key focus of Hard Money Lenders is the fact they’re more concerned about asset valuation and loan-to-value ratios. Most lenders who fund mortgage loans only lend between 50% to 70 % of a home’s value, although banks may lend as much as 80%, and government funded loans can increase upwards to 96.5%.
Private money lenders aka Hard Money also fund short term capital, better known as bridge loans. A good deal on property can be used as collateral for a Hard Money Loan.
For example, let’s say an investor or maybe a home buyer locates a home worth approximately $45,000.00 as it stands, but needs $20,000.00 in repair work, and after it is repaired, the fair market value is worth $100,000, then according to these numbers the Hard Lender can loan up to $70,000, a sum sufficient to cover the costs of the house and repairs.
Despite negative images of an industry preying on those with nowhere to turn for financing as well known for making high interest risky loans, Hard Money Lenders were roundly praised recently by the prestigious Wall Street Journal as an industry that highly contributed to stimulating the nation’s economy.
In the January 7th article, the Wall Journal reported how Hard Money Lenders funded high percentages of loans to commercial developers while banks (last year) only approved 18% of commercial loans.
Further, according to the article, super-rich Wall Street players like Google Ventures and American Express CEO James Robinson have joined the crowd by investing in Pride of Austin Capital Partners.
Express CEO Robinson was quoted as saying the commercial borrowers who benefit from “hard money” financing “is a substantially underserved segment of the economy, that would be left out in the cold, were it not for private lenders.”
Hard Money Loan To Avoid Foreclosure
Part of Hard Money Lenders’ portfolios involves making immediate loans for homeowners or business owners facing foreclosure. It is a vital way to save one’s home or business but some experts caution people to make “hard money” lenders as a last resort.
In a Newsblaze interview, Nationally known credit expert John Ulzheimer of (www.creditsesame.com) offer his firm advice on obtaining hard money loans to avoid foreclosure.
“Hard money lenders should be one of the last options when dealing with a home headed for foreclosure.”
Ulzheimer said during the interview that hard money lenders don’t underwrite traditional metrics like credit quality and income but are focused more on value of the property relative to the liens against the property.
Ulzheimer explains that “hard money loans” default at a much higher rate than traditional mortgage loans, “so the rates tend to be extremely higher, which can make the monthly payment difficult to make, and to qualify for a loan you have to have considerable equity in your home,” Ulzheimer points out.
Ulzheimer further stated that if a person has considerable equity in a home that “selling the house outright is a better option than taking out a high risk loan to save it.”
Someone applying for a “hard money” loan to avoid foreclosure may face the following terms:
- Interest rates: 10% to 18%
- Balloon payment: are usually due between one and two years
- Maximum loan-to-value ratio: this runs about 50% to 70%
- Points: four to eight
As for investors applying for “hard loans” to invest in real estate, expert Ulzheimer recommends that “the investor would benefit better from the deal by using a ‘short term bridge loan’ to flip a property in a short period of time.”
Another benefit for an investor to obtain a “hard money” loan is the fact that the turnaround is much quicker than a traditional bank loan that may take up to 30 days. But since the investor may have a “hot deal” that can turn quick profits, the best route to take is to apply for a “hard money” loan, which can take no longer than a few days.
Hard money loans are not always a bad choice depending upon the circumstances needed to obtain an immediate loan to pay off a debt or invest in a great profitable deal that’s profitable enough to repay the “hard money” loan and still net a profit. Most important, is that it is vitally necessary for a borrower to be fully aware of knowing how to comply with the process to obtain a “hard money” loan.
Tips When Applying for a Private Hard Money Loan
- Plan thoroughly and if possible arrange for an appropriate exit plan before applying for these type of loans.
- Keep in mind: hard money loans are only short term loans that usually last no longer than 1-2 years because lenders often want to make sure that a borrower have a firm exit plan such as selling off your property or arrange to refinance before the loan term lapse.
- Assuming you need a private loan to remodel or repair a property, it is wise to consult a contractor to get a detailed estimate regarding the repairs needed and the expenses involved to complete the project. Having detailed information, lenders in the “hard money” business feel more motivated to invest in your project.
- Beware of “loan-to-own” predators. Their scheme is to structure “hard money” loans in a clever way to force borrowers to default so the lender can easily take possession of the collateral property and subsequently profit from selling the property. This is why a person seeking a loan should consult with an attorney preferably a real estate attorney or financial adviser.
Final Analysis: lenders are savvy people; they know their business; they want your business to make profits but some engage in shady business which means they cannot be trusted to do business with.
Again, read and reread the fine print, and consult an attorney, if necessary.