So Should A Borrower Use A Hard Money Lender

Category: Finance, Real Estate.

I recently attended a real estate investment seminar in Las Vegas.

Even though it has been around for almost a hundred years now, I was amazed how hard money lenders still seem to be mysterious to many investors. Between speeches by different" gurus" I would mingle with other investors and explain that I owned a hard money brokerage firm. They either did not understand how the hard money lending industry worked or had heard that it was something they should avoid like the plague. The most common projects are house flipping, but they are also used in commercial construction and land development. To put it simply, hard money loans are short term loans that are used for various real estate projects. Essentially, a hard money loan is often the best choice for money that is needed on a short term basis. The loans are generally short term between 6 and 12 months and have a high, interest only payment generally between 10% and 14% Another major difference between a hard money loan and a conventional loan is that a hard money loan is not based on a persons credit but instead on the value of the project after its completion.

Unlike conventional financing, a hard money loan also known as a private loan originates from a private individual or institution unlike a bank. A good example is if John has a house that he wishes to rehab and sell for$ 100, 0000 a hard money lender will lend up to$ 65, 000This is what is known as Loan to Value or LTV. Now you are probably asking yourself what the catch is, how do these lenders make there money? Most hard money lenders lend anywhere from 55% to 70% LTV depending upon what type of project the borrower has. Hard money lenders make there money 3 different ways. These are anywhere from 1 to 4 percentage points of the overall loan.

The first way they make there money is the closing costs. These points are paid when the loan is completely paid off in full. The third way they make there money is if the borrower happens to default on the loan. The second way they make there money is the interest only monthly payments on the loan which is anywhere from 10% to 14% . Being as the loan is not based on the person s credit, hard money loans are secured by the property itself. However, it should be stated that this rarely occurs as most hard money lenders are not in the business of foreclosing on properties. If a borrower defaults, the hard money lender now has a property or piece of land for 65% of what it is worth.

So should a borrower use a hard money lender? The simple answer is if a borrower has a real estate project that needs short term financing that a conventional bank will not lend on, yes.

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