Hard money lenders offer a specialized-type of loan backed by real estate. The loans are short term and based upon the value of the real estate that has been collateralized for the loan. The interest rates are typically much higher than the banks rates as the deals are not required to meet traditional banking guidelines. Requirements will range on the type of real estate, loan-to-value percentage, and minimum loan size for a hard money loan.
Since traditional credit principles are not in place to provide protection to investors, they are more risky, and as a result, hard money loans are more expensive. Since hard money lenders may not require income verification, the possibility of a default occurring increases. Typically, individuals choose to enter into a hard money loan when they do not meet the guidelines for standard mortgage financing because of either credit or documentation issues.
The real estate loaned on is generally the hard money collateral. However, it is not uncommon for other assets to be added of the borrower to increase the amount. Often a smaller loan size will be offered based upon a lower "Loan to Value Ratio." The loan may amount to only 65% of the real estate value. Therefore, with additional properties a larger loan amount may be obtained. This process is formally known as cross-collateralization.
Hard money lending may occur in a regional market or nationwide. Money lenders can be represented by brokers who prepare and submit proper paperwork and in return take a percentage of the loan. Other lenders deal personally with their applicants. Charges for prepayment penalties, application fees, and a focus on investment properties will vary between lenders. There are a few online directories which help to connect lenders to borrowers.
Several states such as Tennessee and New Jersey prevent the standard practice of hard money lending under their usury laws which put caps on the interest percentage. Regulations differ nationwide, but generally are determined by the status of the borrower and whether they are a business or a consumer. Consumers generally have greater protection by law, and therefore, it is generally easier for a business to meet the standards. Hard money lending to businesses is often under some of the most aggressive conditions in market.
For more information, advice, and training regarding the practice of hard money lending, please consult the professionals of Pit Bull Mortgage School at their website http://www.pitbullmortgageschool.com
Joseph Devine
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