Hard money loans are essentially short-term loans that are secured by a person’s home. Unlike a more common mortgage, these loans originate from private individuals or institutions and often have short terms (occasionally between 6 to 24 months). Hard money loans also differ from traditional mortgages in that they have much higher rates of interest, often as high as 10% to 14%, in addition to high fees. These loans are attractive to many individuals because, unlike other loans, a hard money loan is not based on a person’s credit.
When to Consider a Hard Money Loan
Because hard money lenders do not require a minimum credit score, individuals facing foreclosure occasionally turn to these loans in an effort to avoid losing their homes. This is because once a lender starts the foreclosure process the borrower is generally so far behind on his or her mortgage payments that even subprime lenders will not refinance the loan. Thus, for some home owners, these hard money loans offer a little more breathing room from eminent foreclosure.
How Hard Money Loans Work
Each hard money loan differs and the lender one decides to use heavily determines the type of loan provided. However, the general terms of a hard money loan are often as follows:
- Interest rates ranging from 12 to 18 percent
- A balloon payment often due after 1 or 2 years
- he mortgage must generally be a first, not a second mortgage
- Borrower should own 30 to 40 percent of their home
- Points: 4 to 8 of the loaned amount. These loans can exceed the general 5 point max allowance which apply for conventional mortgage loan fees.
Tips and Advice
When one decides to pursue this type of loan, there are a few points to keep in mind. First, these lenders are often not easy to find. It is generally helpful to contact reputable mortgage brokers and ask if they know of any hard money lenders with good reputations. Second, these are quick fix type loans intended to be used only for a short duration. In many cases individuals take these loans as a way to stop foreclosure proceedings and have the option of selling their home. Third, be careful of foreclosure scams and predators.
Some individuals and institutions structure the loan terms so that the borrower inevitably fails so they can take possession of the home. Finally, the borrower should be absolutely clear on the terms of the loan as the interest rates and fees are very high.
Help from a Foreclosure Attorney
Although these types of loans can seem appealing, it is important to remember that there are other alternatives. Consulting an attorney in this area should be considered to ensure that all of the options have been weighed prior to obtaining a hard money loan.
