In this article I’ll tell you about why it is important to Reduce your Loss with a Hard Money Loan.
The Benefits of Hard Money Loans
Millions of Americans today find themselves in trouble financially, and in many cases their properties are in foreclosure or on their way there. Securing a loan can be difficult for some, but alternative methods are also available beyond traditional bank lending venues. One of these alternatives is a hard money loan.
A hard money loan is a non-traditional method of obtaining funds, and can be especially useful in cases when an individual or company is in financial hardship. It is essentially a short-term loan based on personal or corporate assets, which can include real estate, equipment or other types of inventory.
These assets serve as collateral against which a hard money loan is secured. Hard money loans are particularly helpful in cases where funds are needed immediately, whether to deal with bankruptcy, foreclosure or other liquidity issues. These type arrangements have developed over time and today are used by property owners needing to convert their holdings into cash.
Hard money loans can be helpful in a number of situations. Individuals with no previous credit history, have bad credit scores or have already defaulted on a loan can find them as useful, as can those who have no proof of income. Property owners seeking to refinance often turn to hard money lenders in order to maintain ownership.
Avoid Fire Sales
Hard money loans are often used to delay the liquidation process. For instance, as a property nears foreclosure, if the fair market value of the property is in excess of the mortgage against it, but the borrower is financially illiquid, debtors often secure hard money loans to “bridge” the time during which they can sell the property.
This borrowing arrangement allows the debtor to keep the bank at bay and to enable the full sales process to complete. The alternative is foreclosure or a short sale, where the property is sold below market prices. These loans can make the difference between the debtor realizing a profit or recapturing some of their equity rather than taking a loss on a forced sale or foreclosure.
When Speed is Critical
Among the other advantages of this type of loan are the shorter time usually required for processing, and the fact that extensive personal documentation of the borrower, including social security information, is not usually needed. Additionally, loans can often be secured for large amounts of cash, with interest rates that are negotiable, as they are not connected to standard bank rates. Instead, the amount of the loan is based on the value of the property or parcel of real estate that is being held up as collateral.
Normally, the amount of the loan can be as high as 65 to 70 percent of the value of the unsecured property. The quick response by which the loans are available is related to the fact that the companies engaging in hard money loans are not subject to the regulations of other lending institutions.
Build Equity with a Hard Money Loan
Individuals or companies seeking property as an investment will find great use of hard money lenders, especially when the property is in need of improvements. The loan can be secured with the specific purpose of renovating the property. Whereas a conventional loan might involve a down payment of 20 to 25 percent, an investor might require only 10 percent down on a hard money loan, with the funds then being used to improve the property.
After the improvements have been completed, the borrower can apply for a conventional loan to pay for the renovated property, whose collateral value has been increased by the improvements. In some cases, the lender will make available a “cross lien” on another piece of property owned by the borrower. Known as “blanket mortgage,” these loans can be useful when there are commercial properties or related businesses.
Hard money loans can be difficult to obtain merely because few financial institutions offer them. Also, they may have hidden fees, and although the rates are usually negotiable, they will inevitably involve higher interest charges. One reason for the higher rate is that the loans are normally done over a shorter period of time than normal mortgages.
A hard money loan can involve interest rates of up to 15 percent and up to five points in terms of additional fees. The convenience and, in some cases, necessity of such loans usually make the additional costs worthwhile. Most lenders are professional in their services and readily able to provide assistance. Hard money loans are not for every situation, but certainly have a place in modern finance.