Purchasing land and building homes are dreams that many people hold dear. Unfortunately, the current economic climate in many areas has produced a class of potential homebuyers who have less than average credit scores. This situation has rendered such people unable to obtain sizeable loans from large institutional lenders like regular banks.
In order to fill in the gaps and serve individuals with less than perfect credit records, special lenders known as hard money brokers provide high-interest loans. These hard money loans may be used for many purposes, but those who plan to use these cash advances for personal home construction may face unusually large future mortgage payments.
Hard Cash Loans: The BasicsHard money is a term for cash loans that brokers provide to people who cannot access mainstream credit markets. These lenders are professionals who often hold real estate brokerage licenses.
The various states regulate the hard money brokers that live and operate in their jurisdictions. These brokers may have relationships with banks or with private investors who are capable of providing sizeable loans in short periods of time.
Because hard money lenders work with businesses and individuals who have credit issues, they usually require loan applicants to put up some forms of collateral. This collateral often takes the form of land or property that may be owned or controlled by borrowers. In addition, lenders may charge loan recipients higher than average fees, as well as interest rates in the double-digits.
Upon receiving loan requests, hard money brokers raise the requisite funding from investors. After assessing the proposed construction projects and settling on loan terms, these brokers then provide funding to loan recipients for their developmental needs.
Hard Money Investors and Their RequirementsHard money investor are often private individuals who are willing to back risky projects. Due to the higher than normal risk of their endeavors, many investors and brokers require borrowers to pay unusually large interest rates. In addition to this, most hard loan contracts stipulate that loan recipients may be required forfeit their properties if they default on their loans.
These high costs make hard cash loans attractive to land developers or property flippers who plan to turn rapid profits. Hard funding can also act as valuable safety nets for homeowners who need emergency assistance to prevent foreclosure proceedings.
Notes for Hard Money BorrowersHard money loans are attractive options for people who have viable construction projects. While they can be easy and rapid to secure, they also present real risks that borrowers should be fully aware of before going ahead with their hard cash deals.
State and federal laws closely regulate mainstream loans that are provided by banks. These regulations require banks to carry large amounts of insurance to protect their customers. Unlike these banks, hard money brokers may not be required to carry the same kinds of insurance, and this can leave borrowers in precarious situations if loans go sour.
Hard money loans also come with very high-interest rates attached. Since these loans often deal with real property deals or construction projects, loan applicants often need to borrow large sums of cash for down-payments and other property development costs. The sheer size of these loans coupled with their unusually heavy interest rates may force borrowers to consistently come up with large, resource stretching loan-service payments.
Given these factors, borrowers of hard money loans often use their funding to pursue real estate project of commercial natures that offer high expected rates of return. Some examples of common uses for hard money loans include place-holder downpayments as well as funding for buy-and-flip renovation projects.
Should Borrowers use Hard Cash for Home Building?The main point for prospective hard money borrowers to remember is that these loans are almost always backed by land or real property as collateral. As such, people who obtain hard money loans in order to buy land for the construction of their personal homes would likely need to use such land, or other real estate holdings, to secure their loans.
Therefore, while it is technically possible for individuals to use hard money loans for home construction purposes, they would need to have solid repayment plans in place in order to prevent foreclosures. For this reason, many who choose to buy development land with their hard loans use their land or their buildings for commercial purposes.