Three Things to Know About Hard Money Lenders

The following article was submitted to me about using hard money lenders (links are for our Real Estate Investor Bronze Members). Personally, I feel there is a limited number of situations where it is appropriate to use hard money.

Hard money lenders provide short-term “Bridge Loans” that provide funds to based on the real estate that is being used for collateral. These companies have much higher interest rates than traditional loans, and there are many other things to understand before getting into these types of loans. Among them are the risks, collateral and market.

There are significant risks to hard money loans. These lenders and investors and not protected from high default rates by credit guidelines. In addition, they do not require income verification, which causes higher default rates. This is another reason that there are higher rates of interest for these loans. Because these loans have higher risks, consumers generally seek them because they cannot secure a typical mortgage due to poor credit or other reasons.

Although hard money lenders usually require the real estate on which the loan is based, it can also include other collateral. One can secure a smaller loan based on a lower “Loan to Value Ratio,” which allows a loan of up to 65% of the property value. Many real estate investors offer additional collateral to secure a larger loan amount, which is known as “Cross Collateralization.” Be sure to balance the money you need with the amount of collateral you are able to put up.

Different hard money lenders serve different geographical areas, from regional to nationwide. You might consider asking your mortgage broker for recommendations. Some lenders are represented by brokers, and some deal directly with applicants. In addition, you should consider other various charges which you might incur such as application fees and prepayment penalties.

If you have decided to apply for a bridge loan, make sure to research your Hard Money Lender. Make sure that you’ve considered all of the risks and decided what collateral you can put up and you’re on your way.

There is a time and place for using hard money lenders. For more information read about the advantages of using hard money loans which covers strategies when it may be appropriate to use hard money.

Until my next post,

James

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