Hard money loans are easiest to know as costly, temporary mortgage loans. Private investors loan money into land owners, along with the property owner ensures repayment of the loan with a lien on the property. Property owners typically only use hard money loans whenever they don’t have time or credit score to qualify for a traditional mortgage loan, or when they require a temporary loan while they refinance from a traditional mortgage into another.
Real Estate Security
The key component of a hard money loan is the lender asks a mortgage lien on real estate to secure the loan. This implies that in case the debtor defaults in repayment of this loan then the lender may foreclose on the property. The lender will sell the property in a foreclosure auction and use the money got to pay off the hard money loan. Due to the mortgage granted to the lender, hard money loans are risky for borrowers.
Underwriting
Hard money loans typically come from private investors or pools of private investors, whereas traditional mortgages typically come from national banks and mortgage companies. Because the lender has a different background, the underwriting criteria for hard money loans are different than for traditional mortgage loans. For traditional mortgage loans, the borrower’s credit score is an integral component of the loan program. But for hard money loans, the borrower’s charge is generally not considered. Rather, hard money lenders typically just care whether they have enough equity in the house. Most hard money lenders will not loan more than 70 percent of the worth of a parcel of property. That way, the lender may foreclose, sell at a discount and get paid off in full in the event the borrower defaults.
Bridge Loan
Hard money loans are risky for both the lender and the debtor. Because the lender has increased risk from minimal underwriting criteria, hard money lenders require a higher rate of interest than traditional mortgage businesses. Hard money loans typically have an rate of interest at least 7 or 8% higher than traditional mortgage loans. Due to the higher rate of interest, most challenging money borrowers try to quickly pay back the loan by obtaining replacement funding. That’s the reason why hard money loans are also commonly known as bridge loans.