Jan 23 2012
Basic Principles Of Using Hard Money Lenders For Investing
In today’s real estate market investors are generally depending ever more on hard money lenders to fund their property investments. Traditional bank lending has experienced quite the tumble throughout the past few years for real estate. Economic uncertainty is a huge reason behind the fall off in bank lending.
Hard money financing is recognised as an asset based lending alternative. The actual loans are all supported by a hard asset, in simple terms. What’s utilized as the asset is some piece of real estate property. A hard money lender can give a loan depending on the property’s value being purchased by the investor and this can work as collateral for the loan.
Most hard money lenders usually grant loans for roughly sixty to seventy percent of the total property value. The rest must be supplied by the borrower in the form of a down payment. This equity requirement gives the lender more security. The object is to make sure that there is not such a big loss in the unfortunate event of loan default.
If the borrower does not live up to the terms of the loan then legally the collateral can be transferred to the lender. To recoup the money lost on the loan the lender can sell the collateral property. Hard money lenders rarely if ever desire to foreclose on loans. It is almost always a losing proposition or at best a break even transaction.
They much prefer if the borrower continue making payments as that is what is most profitable for them. No lender wants to deal with foreclosing on a loan. Considering though that hard money lenders are doing some pretty high risk lending it is no surprise that defaults do happen.
Residential as well as commercial property investing are both uses for hard money in the industry. Office buildings or construction development land could be some commercial uses for hard money that an investor might do.
A residential property that an investor could use hard money lending for would be for example an apartment complex or land to build one on.
Bridge loans are another common form of hard money loans. A lot of times an investor needs very quick financing that banks are not able to deliver. While waiting for regular bank financing hard money lenders can grant loans quickly in the meantime.
These lenders can originate loans in a period of a week and sometimes even less time than that. So while waiting for permanent and likely cheaper funding from a bank, the hard money loan makes available funds to bridge the gap.
Rehab loans are yet another use for hard money. Rehab loans are for properties that need some sort of improvement or repairs before they can go on the regular market. Generally the loan will be enough to purchase the property and also pay for whatever improvements must be done.
Interest rates charged by hard money lenders do tend to be quite a bit higher because of the associated risk of hard money finance. Charging more points for the loan is common too.
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