Hard Money Loan Explained

If you own real estate whether it is single family home, condo, apartment building or a commercial property, in this economy, chances are you already know about Hard Money Loan.
Basically a hard money or a private money loan is a sub-prime loan. A lender puts more emphasis on the security rather than your income and credit. When you go to a pawn shop to pawn an item, the shop owner does not care what you do for living, how much you make, and what your credit score is like. He only cares for the value of that time and that too a firesale value.
Similarly, a private lender, looks more at the value of your real property and how much equity you have in it. If the property is worth a million dollars and you owe $300,000. You can borrow $200,000 to $300,000 more on it easily. The formula lenders use is called loan to value ratio. In most cases you can get a loan up to 60% loan to value ratio.
Qualifying for this kind of loan is less stringent as compared to a conventional loan especially when it is a non-owner occupied or a commercial property. Debt ratios are liberal and credit score has little consideration. Compare Business Loans If you had great debt ratios and good credit score why will you be applying for a hard money loan? So, if your hard money lender is asking you for your credit score, you need to call someone else.
The Pros are it is fast. In most cases you can get funds as fast as five working days. Qualifying, as mentioned above, is a lot easier. Without hard money loans lot more people will lose their properties. Hard money or private money loans fulfill an important need in the society. It is a bridge loan and can be a great relief. It is also called a band-aid loan.
The Cons are it is short term. generally no more than seven years. Mostly it is from one to three years. It is interest only. Interest rate is high, from 10 to 12%. Fees are high. Expect to pay three to 6 points.
Not everyone who gets a loan like this has credit or income problem. In this economy, more and more people who are borrowing private money have good credit and good income but somehow cannot get a bank or a conventioanl loan for one reason or the other. Banks are taking months to close a loan.
Money for funding these loans comes from private investors; Personal Finance Tips 2019 from retirement; hedge funds and Trust Deed Investors.
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