Jan 21 2012
Information About How Hard Money Lenders Operate
All hard money lenders do what is recognized as asset based funding to their clientele. The asset associated with the financial loan would be the property or home that the investor is actually borrowing against. These lenders work with an LTV (financial loan to value) ratio that’s a good deal below what a standard bank would grant a financial loan for.
The standard LTV for hard money is right around sixty five to seventy percent. So if a customer wanted to purchase a property that cost one hundred thousand dollars a hard money lender would grant a financial loan for approximately sixty five thousand to seventy thousand dollars. For the rest of the cost the customer will actually need to come up with his own money as a down payment.
A down payment of this amount is more like what traditional banks used to require for housing mortgages. In the earlier part of the century, at least for personal home buying, people would have to put down as much as fifty percent of the value of their homes to get a financial loan. It was also a bit more expensive to borrow then, as the interest rates were set by the market instead of central planners at the Fed. People saved more as a result of these higher rates, that is always better than getting in more debt.
These days hard money funding serves more short term borrowing needs. Usually hard money lenders give loans for a couple of months to perhaps a few years. Rates of interest will actually be quite a bit higher than what you pay to a bank. And one reason for this is the much higher risk hard money lenders are exposed to.
The borrowers are often funding real estate transactions that may be uncertain or highly risky given today’s market conditions throughout the sector. Therefore hard money lenders need to charge more interest to get paid for the higher risk of default on the payments. The higher down payment requirements are another reason. The customer is thus also incentivized to pay off the financial loan.
12 to 18 percent is a pretty typical range these days for hard money interest rates. So they are quite a bit higher than a bank’s normal rate of four or five percent. The Federal Reserve’s massive monetary inflation will actually probably cause these rates to both go higher throughout the next few years as the money continues to lose value more rapidly than it already does.
Real estate investors often use hard money lenders because of how fast they can originate loans for their investments. In the real estate business there is often not a lot of time to transact. As a bank might take thirty days or even more to fund a financial loan, this is not a viable option. But a hard money lender, however, may be able to fund a financial loan in as little as three days.
Quite a few hard lenders will actually actually make a sound commitment as to the specific day the funding will actually be available. Knowing that the money will actually really be there when they need it gives borrowers more confidence throughout the lender they are using.
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