A private lender that lends money for a quick-sale property value and protects the loan through securing the property as collateral is a hard money lender.
The best way to describe hard loans would be to call them short term cash loans that can last anywhere from three years to five years. Loans of this type will come with a much higher rate of interest because hard money lenders present greater flexibility and are not locked into the lending rules you will find with banks. Therefore, hard money lenders do not mind providing loans to borrowers that are a risk. This opens the door to higher interest rates that are in the neighborhood of 10% and 18%. A hard loan can often be approved within three days.
The most vital aspect of a hard loan deal is the very fast sale value of the property. The quick-sale value of the property would be the market price it can acquire if it is sold within 1-4 months from the date of the loan. Lenders are also aware of the fact that if the borrower defaults, the have access to the property so the hard loans will be structured up to about 70% of the property’s quick sale value. Other factors are present that will figure into the structuring of a hard loan and its interest rate:
Repayment ability of the borrower Risk profile of the borrower Present real estate market What type of applicant should obtain a hard loan and when those real estate investors with a lot of experience will stay on top of the market should look closer at a hard loan when a profitable buying opportunity arises. Entities with a lucrative offer but no available bank financing might wish to take advantage of a hard loan for the short-term to gain access to the opportunity. Anyone that wants to buy a home for the purpose of flipping or renovating it and then selling at a profit might wish to use a hard loan to pay for the repair work. Any person wanting to flip property could look to buy a foreclosure or other cheap homes and then sell them as quick as possible is advised to check out hard loan opportunities. Buy-to-let property investors can consider such loans if they have low credit scores.
A few precautionary measures to weight before getting a hard loan
Borrowers must check the terms carefully and ensure that the loan fees, insurance, minimum loan duration, and prepayment charges, if any, do not eat into their profits.
Borrowers must be dead-sure of their repayment capabilities. If they default on the loan, they will find their homes in foreclosure listings.
A short sale, the type of sale that involves selling where the value is way short of the liens on the property, might also lead to a host of problems. A default on a loan can lead to a major lawsuit.
Borrowers are well advised to look at the profile of the lender on the BBB and also to discuss the issue with reputable references.
The borrower should take the proper amount of time out to examine the real estate market before taking out any loans. If a crash appears possible, the plans to take out a loan must be addressed accordingly.
There’s nothing evil about a hard loan – in fact, the rate of interest on a hard loan is marginally more than the interest rate on a credit card. A hard loan can help you seize a profitable opportunity or tide over a difficult situation, and if you are a responsible and mature borrower who is not getting finance from conventional sources, then you must go for a hard loan.