When you hear two investors talking you will sometimes here money being described as “hard’ and soft. In fact these terms are used to describe different types of borrowing used by real estate pros and other investors to finance their purchases. The term soft money is used to describe money lent by banks and financial institutions. Hard money is used to describe money lent by private individuals known as private money lenders. Obtaining a hard money loan is usually much faster than obtaining soft money loans and thus it is very useful in cases of emergency.
Different people have different uses for these types of loans. People who are having exceedingly bad credit ratings will find it difficult to persuade sub-prime lenders to extend them soft loans. In such instances hard money lenders can help an individual to qualify for a mortgage by repairing the credit. What it all means is that hard money lenders profit by lending cash to people whom the mortgage companies and banks won’t even touch. Such people have shot themselves in the foot by being financially irresponsible, people who simply didn’t care what tomorrow might bring when they were spending beyond their budgets. Real estate investors often hope to close a real estate deal fast. Most plan to flip the property and make a fast profit by putting it up again for sale. While some experts have their own cash, others will prefer hard money loans. Finance charges and rates are very high for such short term loans. But investors don’t really mind because they are able to turn a quick profit far in excess of the interest costs. Such investors cannot wait for the traditional banks or mortgage companies to process their applications for fear of their deal falling through. Others will have problems getting approved for traditional funding methods because of poor credit or bankruptcies.
Considering the circumstances under which the private financing lenders lend their money it is not surprising that their terms and conditions differ from those of the institutional lenders. These lenders usually lend on the basis of the deal or property under consideration. They usually loan a certain percentage of the fair market value of the property. Most companies in our list of private lenders will provide applicants with different financing methods and choices. Options include fix and flip and cash out refinance. Some applicants can qualify for state specific programs. For example, you can be approved for 2nd trust deed loans in California and commercial refinance loans as well. Under the circumstances these lenders charge very high rates of interest which may go up to 20%. The term of such an online loan is short, usually varying from six months to a few years. The interest rates vary depending upon the borrower’s credit rating and the financing term. Usually they charge higher rates of interest for shorter terms which are approved quickly.
Borrowers must be careful when opting for a hard money loan with any traditional fix and flip project. As it is very expensive it should be the last option. Borrowers who are facing foreclosure should explore the option of declaring bankruptcy first as it may provide some relief. You also need to be on the lookout where you can’t even use loan service. The Housing and Urban Development Office just released a study of people who applied for private money loans on manufactured homes. If a hard money loan is they only option then the money should be used for improving the financial and credit standing of the borrower and not to add a further burden. Real estate investors who are interested in flipping properties prefer to borrow from hard money lenders because by being able to offer cash upfront and closing the deal quickly they are able to negotiate higher than usual discounts with the sellers. However, these investors should be careful and consider all the costs involved as well as prevailing real estate market conditions before opting for a hard money loan.
It is not very difficult to find hard money lenders that work with bad credit applicants. You may be able to find one in your neighborhood. You can get information from your broker or title company. Some private money services will advertise online and offer their expertise when you search for online lending and real estate related terms. Even the mortgage companies may be able to guide you to. You should consider a few hard money lenders before finalizing the deal. A search online can also be fruitful. You should also check with the local Better Business Bureau or the State Attorney General’s office to find out if they have received any complaints against the private lender. Legitimate financing companies will usually require very few documents. Make sure that there are no pre-payment penalties. Hard money can be very useful if it is properly utilized.