Hard Money Lender Real Estate
Hard money lender real estate refers to private lenders providing financing to home buyers and investors for the purchase of real property. Hard money loans are considerably more expensive than conventionally financed loans and are intended as short-term interim financing.
Hard money lender real estate funding is often the only source available to borrowers with bad credit. This type of home mortgage loan can be used to help borrowers establish or rebuild credit. Real estate investors sometimes obtain hard money loans to purchase commercial real estate or investment properties intended for house flipping.
Also known as bridge financing, hard money loans should not be used for long-term financing because the interest rate is significantly higher than conventional home mortgage loans. Hard money loans can be used in conjunction with conventional loans, such as seller carry back mortgages.
Using seller carry back financing, sellers provide a portion of financing to help borrowers obtain financing for the balance of the mortgage note. For example, the seller owns property valued at $300,000 and carries back 40-percent of the loan value, or $120,000. The buyer obtains the balance of $280,000 through a traditional lending source such as a mortgage lender or credit union. The buyer has two mortgages - one with the lending institution and one with the seller.
Hard money real estate loans are typically restricted to no more than 70-percent of the current market value of properties. Buyers must either provide upfront cash payment for the remaining balance or obtain financing through another source.
Interest rates charged against bridge loans must be in accordance with usury laws. Each state regulates the amount of allowable interest charged against private loans. Florida has the highest usury rates in the U.S. and is capped at 25-percent. However, most hard money loan contracts include a default rate which allows lenders to increase the rate of interest if borrowers make late payments or enter into foreclosure.
Default interest rates can soar as high as 29-percent in some states. The rate of interest charged against hard money real estate bridge loans can vary depending on the amount of the loan. A list of state usury laws can be found at UsuryLaw.com.
Most home mortgage loans include prepayment clauses. Hard money loans are no different. The goal is to refinance into a conventional mortgage as quickly as possible. A six month prepayment clause is acceptable, while two years is not. Consult with a real estate lawyer before signing hard money loan documents. At minimum, thoroughly review the Truth in Lending disclosure and understand contract terms.
Hard money loans are typically not the best form of financing. However, they can provide a second chance to borrower's with less than perfect credit or to fund projects where real estate is not in marketable condition.
Take time to understand the advantages and disadvantages of hard money lending practices. We invite you to browse our home buying and real estate investment article library. Discover first time home buyer tips, home buyer programs, mortgage loan financing options, and much more. Subscribe to our mailing list to receive notification of newly published articles.
Published on February 01, 2010 at 02:28 AM