It might be new information and even come as a surprise to many people that even money can be categorized as soft and hard money. Soft money usually refers to the loans that are given by banks in general whereas hard money refers to the loans that are not given by banks and are obtained from some other institutions. These loans carry with them a higher rate of interest as compared to the traditional loans on housing properties. Also these loans can be short term and even based on assets where one can use his existing property as collateral for the loan. They are often secured from independent loaning business or individuals.
Why Hard money loans?
Hard money loans act as the crisis loans; these are issued at times of serious financial distress like a foreclosure or bankruptcy. These loans are a good option to opt for, if one is looking for quick cash and does not have a very impressive credit score to qualify for some other loan. Although these loans have higher rates of interest than most other forms of loans offered by the traditional banks, they do manage to get you quick cash.
How do hard money lenders offer loans?
The loan is in general based upon the quick sale worth of the property. The quick sale worth of the property is nothing but the current running market price of a property at any given day. It is very essential for the lender to know because based upon it, he will know that in case the borrower fails to repay the loan then in those circumstances how well the collateral will be able to pay his loan back usually in a four month time frame.
Since the borrower’s credit is not given much importance in these loans the value of the collateral and its capability to pay back the loan in full automatically becomes a thing of prime concern. The amount of the loan that is granted will depend upon this estimated quick sell value of the property. Usually the loan granted will be around 50 to 60% of the quick sale value or the worth of the property, it is kind of a loan to value amount. This entire clause of the quick sell value serves as a safety measure for the lender should the borrower default.
Regulations for the hard money lenders
The hard money loans are not regulated by the state laws in general but there are certain states that may put some restriction on the interest rates incurred. These rates do not have anything to do with the rates that are offered by the traditional banks. The factors that are instrumental in determining the rates of hard money loans are the availability of the hard money loans and the real estate market. These loans tend to be much more expensive than the general lines and hence carry a risk to the person taking the loan, this risk translates into the collateral that is used as a support for the loan and its market value in the real estate. In a hard money loan there can be various forms of penalties involved and the rates can usually take a hike in case of late payments or deferred.
The points charged by the hard cash lenders are higher than the points charged by the banks by a fair 1 to 3 points. The points charged by these lenders can range from anywhere between 2 to 10 points.
Hard money loans are preferred by people since it does not involve financial management and saves the equity as well but it involves a lot of risk too therefore one should consult a professional property assessment official.
Taking hard money loans should always be exercised as the last option. This is more owing to the fact that only a few states have regulations in place so failing to repay them can always need you to deal with the collectors who often take to harassing you in different ways to get their repayments. More so, the interest rates are too high and the penalties so stiff that they can always force the customers into a vicious cycle if they fail to repay on time and resort to the debt settlement activities. However, these might prove to be more difficult as the lenders are fearless in such cases.
