What Is a Hard Money Loan?
Imagine that your kid brother has found himself in a real mess – drowning in $50,000 of bad credit card debt from gambling, wild nights carousing the streets of Las Vegas, lavish designer clothing purchases and dining out, ordering $50 bottles of wine and filet mignon. When he comes to you, begging for your help to save his $70,000 mortgage teetering on foreclosure, you groan.
You’ve been wise with money your whole life, you’ve always planned for the future and you’ve saved quite a penny. You know it’s risky -- he is a bad apple and may or may not pay you back. “I’ll even pay yah 18% interest,” he pleads. Finally, you give in.
Video: Hard Money & Construction Loans
A hard money loan is private money loaned to risky borrowers who can’t verify their income or meet traditional standards in terms of employment information or credit scores. The amount given out is based upon the value of the property’s “after-repair value.” People faced with foreclosure might get a hard money loan to save their property: the 12-18% interest is better than the cost of losing their home! People may also seek hard money loans to finance construction projects, to flip houses or to refinance existing loans. In the long run, these loans cost more, but it can really help someone who’s in a pickle.
Hard Money Loan Market Trends
Today the maximum amount lenders will loan out is 50-70% of the property value (not including repairs). So if a property is worth $100,000, the borrower will receive $50,000 - $70,000. At worst, a $100,000 loan could cost $8,000 up front and an additional $1,507/month in principal and interest payments. If the borrower cannot repay the debt, the lender can foreclose the house to make a profit for the extra time and hassle.
To take out the loan, you must be willing to put down up to 20% of your own money to show you’re not an absolute deadbeat. Some borrowers get that other 20% from another private lender, so they don’t have to really put any of their own funds up. The borrowing term is usually from 3-5 years. Sometimes you may need a good credit report, but not always. The good thing about a hard money loan is that your payments are not usually reported to the credit bureaus, so the transactions will not affect your credit score.
Video: Hard Money Loan Contract (The Marx Bros.)
Secrets to Getting Hard Money Loans
The key to snagging a hard money loan is to network and develop positive rapport with local loan brokers. These wealthy lenders hang out at real estate investor clubs, where you can go to learn more about real estate investing or what kind of capital is available to borrowers in the private lending market. Settlement and closing attorneys also know a thing or two about seeking hard money capital. Since they usually prepare loan documents for hard money lenders, they know just where to guide you. Similarly, accountants are used to having clients who have a lot of money they need to “stick somewhere,” so some of their high-wheeling clients may be private lenders. Most mortgage brokers have at least one hard money lender in their pocket as well, so it pays to ask – even if you have to pay the broker a fee for the referral. Of course, you can also check newspapers, Craigslist and other internet resources for hard money lenders, although you may have to weed through the scams.
Additional Resources
For more information about using hard money loans in a foreclosure situation, you can check out the Foreclosure University page. Here you can read a Washington Post article, where a professor asserts that “the hard money lenders’ day has come.”