Ways Private Financing Can Help Investors Obtain Loans

Sometimes a corporate borrower requires liquidity, yet doesn’t meet the criteria for conventional home loans or mortgages (mainly non-conforming loans). These types of secured loans based on property collateral are frequently termed as hard money loans. These loans are provided by money lenders, folks or groups who specialize in this kind of lending. They’re ready to write a check promptly to the borrower the moment he or she is assessed for credit risk.

Hard money lenders charge increased interest rates compared to regular property backed lenders, as there is a much higher likelihood of failure to pay, and typically the hard money loans are the last secured lenders to get their money back in bankruptcy filings. These loans are granted based upon the most recent appraisal of ARV (after-repair value), and the loan usually will be for no more than two thirds of that value. Sometimes this kind of financing is called a bridge loan and the contract for which is written for short durations until the home owner can work out a more permanent solution for financing. So a higher proportion of the loans granted by hard money lenders are contested in court.

The high interest rate charged is to provide protection against the higher chance of default as well as the associated court costs with a default on a loan. Local governments sometimes ban hard money lenders from operating because of the high interest rates they charge. Many people see this as an infringement on economic freedom.

Thus the lenders in the industry are highly local, highly segregated and small organizations due to local regulatory practices. Some oversight is provided to this unusual market by regulatory organizations which are few and mostly just known by professional real estate property financiers.

Loan sharks sometimes abuse the legitimate lending process by charging exorbitant rates of interest and pretending to be genuine hard money lenders. Some debtors are not sophisticated enough to understand what they’re getting into when they sign their home over as collateral and therefore are vulnerable to certain unscrupulous lenders who may take advantage of their lack of knowledge.

Legitimate hard money lenders tend to charge rather high interest rates, however, the prime rate plus fifteen is common with five points on the borrowed funds. The credit rating of the borrower will determine the specific interest rate a hard money lender will quote. Other factors for the quote can be the local real-estate market, local usury laws, as well as the general condition of the credit market in the locality. Many commercial real estate property developers know multiple local hard money lenders, and can shop around to get access to lower rates, higher ARVs, and less onerous terms, yet persons hoping to refurbish and flip a property investment should carefully research any person firm they consider financing with.

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