Nothing is guaranteed in an unstable economy. Sometimes it seems even after working endless hours there still isn’t enough resources to meet all your needs. With an immediate need for cash, the homeowner’s best option is hard money loans. A hard money loan allows a homeowner to use their home as collateral in exchange for cash.
Financed through private hard money lenders, the repayment interest rate is much higher than loans acquired through traditional sources. With the possibility of a repayment period lasting several years, homeowners generally use the money to finance a big project or pay off a large amount of debt. Some use the loan to pay off a current home foreclosure.
Because the borrower is a high risk, the maximum value on the home is limited to 70% of the home’s quick sale value. A homeowner may receive less at the loan provider’s discretion. The quick sale value is the amount each lender will receive if the borrower defaults and the home is sold within 1 to 4 months.
A majority of the lenders are first lien holders. This means if the borrower defaults, the loan provider is first to receive payment after selling the home. Although rare, some lenders will elect to become a junior lien holder. This is also known as a mezzanine loan.
However, because of the asking price, most homes do not sell. It is listed a part of the REO properties for sale. The home becomes a non-functioning asset because it is not used in the business’s every day function.
The federal government does not regulate these types of loans. It’s left to the state discretion. However, in most states lenders are only subject to the usury law. Starting around 11.5% most interest rates cannot go more than a few points that rate. Home interest rates vary between 1 to 5 points.
These loans are not limited to residential properties; most lenders will invest in commercial property. These loans are more expensive than traditional hard money loans because of the increase risk involved with investment properties. In certain cases, the lender will invest in properties that are not occupied by the lender. Because of its nature, a commercial hard money lender will have a large deposit on reserve to protect their interest in case the borrower defaults.
Author: Jerri EideThis author has published 7 articles so far.