Things are very interesting in the foreclosure real estate market these days: There is still a wealth of opportunity to buy a foreclosed property cheap and sell for a nice profit, but lenders are still afraid to welcome all borrowers with open arms. For those who do not have the cash needed to purchase a distressed property it could seem like it would be impossible to enter the market. If this is your situation you should keep in mind that there are millions of people who do have the kind of cash which would be needed to purchase a foreclosure, and often this money is available through a so-called hard money lender. But, before you run out and make a deal with your local hard money guy (or gal) take a look at this Q&A in order to familiarize yourself with hard money.
Who are Hard Money Lenders?
Hard money lenders are anyone from private citizens to corporations who pool money for the purpose of lending it out. The money pools often come from doctors, lawyers, and other people with extra money who are looking to get a significant return on their money.
Why are there Hard Money Lenders?
Hard money lenders fill a place in the economy that the average bank would not touch. They deal in riskier loans, the kind of lending that the banks’ regulations and underwriters would never approve of.
Is Hard Money Lending Legal?
In general hard money lending is legal, but each state or municipality may have their own licensing or registration requirements, or other restrictions. Hard money lenders should not be confused with loan sharks. While loan sharks are universally illegal, hard money lenders operate legitimate businesses which have a legitimate business model.
What are some of the Terms Hard Money Lenders Require?
Hard money lenders are usually more liberal with some of the loan requirements than banks, but stricter with others. For example, many hard money lenders do not care what your credit score is. Also, hard money lenders will often take into account the money you need to fix up a property and get it ready to sell or rent.
However, most hard money lenders will not lend over 70 percent of the final value of the home. So, if you want to purchase a home for $100,000, and put $50,000 into it in order to get it ready for sale at a value of $200,000, the hard money lender will likely not lend over $140,000 (70% of the $200,000). For this reason you must research your deals well before applying.
What are the Major Disadvantages of Using Hard Money?
The major disadvantage of borrowing from a hard money lender is the cost. They will frequently charge a several percentage points of the loan amount as a commission, and offer an interest rate which is far above the going rate at a bank.
What are other Advantages of Hard Money?
Because hard money lenders have cash on hand and less red tape than banks, they can usually finance a deal far more quickly than a bank. If you need cash within a week or two, there may not be any other option than going to a hard money lender.