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What Is Hard Money Lending On A Mortgage Loan?

By Bob Redtree

Hard money lenders are groups of retired investors that loan money to high risk borrowers that cannot get the money any other way.

People that borrow from hard money lender on a mortgage loan are usually people that cannot get regular loans because of credit history, delinquent loans, lawsuits in litigation, etc. They must agree to turn over the loan to the hard money institution if they default on the loan, thus giving away the lucrative deal to the hard money lenders. Usually these are short term loans at high interest rates because the borrower is going to do the deal within the first year. These type of lenders provide funding based on the value of the property that is being used for security for the loan.

Lenders of this type usually have a long list of hoops to jump through on a loan to value percentage.

HARD MONEY LENDERS ARE INVESTORS

Hard money lenders may not require the same income verifications that regular banks do. One of the reasons they charge a large amount in interest is because of the higher default rate among the borrowers. One stipulation will be if the borrowers cannot make the monthly payments that have to sign a letter of intent to turnover the property in question to the hard money lenders. The money the borrowers would have made on the lucrative deal is now in the hands of the hard money lenders who will now do the deal and take the profit.

COLLATERAL

The collateral that is used for security is the property loaned on then. They may also opt to loan no more than 60-65% of the actual appraised value of the property in question. Borrowers may then be asked to put up more property as security in order to obtain a larger loan amount. Cross-collateralization is the term used in this case.

HARD MONEY LENDING ON A MORTGAGE LOAN

They may at times show a willingness to lend hard money on a mortgage loan as well. Terms may be to the liking of the borrower on a mortgage loan in this case but they will more than likely have a loan to value hoop to jump through, meaning the borrower will have to come up with a 35-40% down payment as well as looking at a large interest of 10-15% on the loan. It is not always in the best interest of the borrower to go this route, unless all other avenues have been exhausted. Mortgage loans through a hard money lender is not recommended.

A Federally chartered bank may offer relief in this scenario by offering a competitive loan rate to the borrower on a mortgage loan but may also may attach to the agreement a high prepayment penalty fee in case the house is sold within 1-5 years. Statistic show that home-buyers only stay in there newly bought homes on average of 33%. Which means that the high penalty prepayment fee is valid and also works in the banks favor.

Related posts:

1. What Does A Mortgage Lender Consider When Making A Loan Decision?
2. Can I Save Money With A Fixed Rate Mortgage?
3. How Can I Save Money On My Mortgage?
4. What Is A High Ratio Mortgage Loan?
5. What Is A Mortgage Combo Loan?