the world of hard money loans (private lending) is uncharted
territory for most people - and it's not a "safe"
environment like traditional mortgages. Along with the no-questions-asked
financing comes some potential consequences for those who
don't know what they're getting into. This article explains
the process in detail...
a "Hard Money" Mortgage?
money mortgages are typically the vehicle of last resort,
made to borrowers who are unable to get adequate financing
from conventional lenders like banks, credit unions, and traditional
mortgage companies. Hard money mortgages are offered by "B"
lenders, they are either private investors and or private
the most part when it comes to lending requirements and practices
you will find them to be the most lenient and flexible about
accepting risk much more so than your mainstream "A"
lenders. Situations that will land you at the door steps of
hard money lenders are, a poor credit rating and/or financial
history, the acquisition or refinance of a property that doesn't
fall within the categories or guidelines followed by mainstream
things like debt servicing guidelines, ability to prove income
that are more strictly followed by traditional lenders are
considerably more fluid with hard money lenders, there may
also be a tight timeline that needs to be met, again the hard
money lenders can act far more quickly than the mainstream
are the Costs?
course all this flexibility in terms of approval guidelines
for borrowers spells additional risk to these lenders, they
offset this risk by charging much higher interest rates and
fees than your mainstream lenders. There is really no set
of rules that all hard money lenders adhere to they pretty
much all do their own thing.
said that however, there are some average rates and fees you
can expect to pay, for example you will find rates in the
range of 8% to 16% and fees will vary between 2%-6% of the
loan value. I know this sounds like a broad range but these
things vary from deal to deal due to the very nature of the
risk associated with that deal.
example a first mortgage charge will normally carry a lower
rate than a second mortgage charge, another deal that is requiring
a higher loan to value will be priced higher than one with
a lower loan to value. Basically deals are priced on risk,
the higher the risk the higher the cost.
thing to be aware of is that hard money lenders do not do
high ratio mortgages, in other words they generally like to
see at least 25% equity in the property, therefore lending
no more than up to 75% of its value. Now I have seen situations
where some of them have even gone up to 85% but that's a one
off, certainly not the rule. Most hard money lenders do interest
only payments for the term of the mortgage thereby keeping
the monthly payment costs lower than if it was a blended payment
of principal and interest.
final note because hard loans carry substantially higher interest
rates they should only be used as a short term financing
solution, and by short term I mean a term that ranges
from 6-24 months.
are the two most important questions you need to ask yourself:
Can I make the payments? Make sure the answer is yes!
Now many of you are thinking, who would be crazy enough to
go into debt not knowing if they can or cant afford
to make the payments you would be surprised! In fact a fair
amount of borrowers who get into trouble do so because they
dont have a monthly budget! Thats right, its
not only this one payment you have to worry about, its
all of the rest of your financial obligations.
there are hard money lenders out there who will add your payments
into the overall mortgage provided there is enough equity.
By doing so you won't have to worry about coming up with the
monthly payments out of your pocket during the term of the
mortgage. My caution to you here would be, only do this if
by doing so you are improving your overall financial picture
and exit strategy, and not simply buying time because you
can't make the mortgage payments.
What's my exit strategy? It better by a clearly defined
one. Now I know that you dont want to pay the typical
high interest rates that these loans come with forever, right?
Thats why these loans should never be viewed as anything
other than short term due to the interest rates, there should
always be an exit strategy going in.
whats yours? Whats going to change during the
term of this loan thats ether going to allow you to
pay it off completely or get it refinanced at normal rates?
Is this hard money mortgage going to allow you to improve
your credit score enough to take it out with conventional
financing at the end of the term? Will you be able to fix
up the property and sell it before the mortgage matures? Do
you have some other investments, settlements and or inheritances
etc coming in that will pay off this debt? Make sure that
this financing will be able to stabilize and help your situation
well enough so at the end you can pay it off and ride into
you find yourself in an overwhelming financial situation,
such as a bankruptcy and or imminent foreclosure, medical
illness, divorce, job loss etc and a hard money mortgage is
the only way to avoid a financial catastrophe I want you to
keep the following in mind. When you are under this type of
stress and duress, you may be exposed to unscrupulous and
predatory lending practices and schemes.
vast majority of hard money lenders aren't the loan sharks
and gangsters you see in Hollywood movies and they're not
out there to gouge you, that's not to say that some of them
won't given half a chance but most occupy a perfectly respectable
and fill an important niche within the mortgage lending sector.
If you want to improve your odds of meeting a professional
do the following, shop around, don't be afraid to ask questions
and do your homework. Hard money mortgages can either be a
viable "Plan B" or one-way-ticket to financial disaster.
thy exit plan - and know it well...