Hard Money Lenders
What’s the first thought that pops into your head when you hear the term “hard money lender?” Perhaps it is something related to suspicious lenders conducting their business in dark alleys and charging sky-high interest rates?
Some years ago, this perception was pretty accurate. Indeed, some black sheep have tarnished the reputation of the hard money lending industry in their attempts of loan-to-own and providing risky loans to borrowers. However, fortunately, these bad apples do not exist in today’s market, and hard money lenders offer tenfold benefits to their borrowers.
This article will explore everything a beginner needs to know about hard money lenders and how these loans work. Let’s begin!
What is a Hard Money Lender?
A hard money loan is a short-term loan secured for real estate. The loans are funded by either an individual hard money lender or a combined fund of lenders. Albeit short-term, these loans can be extended to longer terms of up to 5 years. The borrowers need to pay monthly interest payments plus principal or only interest, and the balloon payment is paid when the term ends.
The amount of money lent to borrowers is primarily based on the subject property’s value. This property can be owned by the borrowers who wish to use it as collateral, or it could be the property the borrower aims to acquire.
Although credit has some value to the lenders, they are primarily concerned with the property’s value rather than the borrower’s credit. Borrowers can obtain hard money loans if they have enough equity in the property being used as collateral, even if they cannot get conventional financing due to recent foreclosures or short sales.
Simply put, hard money lenders offer a golden opportunity to buyers when they haven’t had any luck with banks.
Interest Rates and Points for Hard Money Loans
The interest rates and points charged by hard money lenders are not the same as banks. They vary from lender to lender and also vary based on region. For instance, California has lower interest rates compared to other parts of the US since there are plenty of hard money lending firms in the state, and each firm wishes to stay at the top.
As you can tell, hard money lenders risk their loans more than conventional bank loans. Given the high risk, the interest rates are higher than traditional loans. The rate of interest lies in the range of 10-15%, depending on the risk, the lender, and the region. As for the points, they can range anywhere from 2-4% of the total amount of loans. The loan-to-value ratio is also factored in to determine the interest rates and points.
