With interest rates in the real estate markets set to rise, times may be getting ready to get tough for real estate developers. That said, it may also be a time of great opportunity. This is because as many large mainstream banking institutions continue to tighten their lending requirements, they also continue to freeze larger numbers of people out of the mainstream lending markets. Such individuals represent a sizeable chunk of the credit market. Hard money loans serve this market and help to fill the growing gulfs between regular banks and credit challenged people. While they do pose some real risks, they may allow careful individuals to finance successful projects that may be otherwise impossible to pursue.
Just What are Hard Money Loans?
Hard money loans are special cash offerings that people with less than perfect credit can apply and qualify for. Offered by hard money brokers, these loans often span amounts from as little as $10,000 to over $25,000,000 or more, making them useful for people who need to purchase or develop real property. Because they tend to serve individuals who need large amounts of money quickly but who may not have perfect credits scores, hard money loans can carry higher than average market interest rates. That being said, hard money brokers and offerings can fill holes in the regular real estate credit markets and allow for the development of properties that may otherwise lie dormant.
How Does the Hard Money Loan Process Usually Work?
While the hard money loan process may at first seem complicated, it can actually be fairly easy to grasp. The hard money market exists to serve loan applicants who are on regular institution loan-rejection lists. While such people may have had personal or commercial financial difficulties in their pasts, many of them are skilled and experienced professionals who may have simply had bad luck.
Since most regular banks refuse to do business with people with relatively low credit scores, these individuals are often obliged to find reputable hard money lenders in order to finance their personal or commercial real estate projects. Hard money lenders may raise money for these loans from a variety of sources, including regular banks and private venture capitalists. Once they secure funding, brokers then use it to finance their clients. Since they serve individuals with low credit scores, brokers usually require applicants to put up collateral. In the case of hard money loans, real estate assets such as land or buildings are often used for this purpose. Once an agreement is finalized between brokers and borrowers, the funding is turned over to clients for use as they see fit.
This process usually works well for all concerned parties, even though these loans tend to come with higher interest rates than regular bank loans. If all goes well with the borrowers and their projects, they will be able to repay their loans in the agreed upon time periods. If not, lenders may seek to recoup their funds by various means that may include using collateral lands to pay for outstanding loan balances.
What Situations are Appropriate for Hard Money Loans?
People who are interested in getting hard money loans should approach the process with caution since the consequences of defaulting on these kinds of loans can be high.
If used properly, hard money loans can be very useful in certain situations. These include:
- Short Term Loans: Hard money loans tend to carry higher than market interest rates that can span between 10-18-percent. At these rates, it makes sense for loan recipients to use their funds for short-term projects like buy and flip deals.
- Interim Loans to Prevent Foreclosure: People take out home equity loans for many reasons, including for medical bills or to send their kids to college. Sometimes these loans may go into default, which can lead to foreclosure. Individuals who are facing foreclosure but still have large amounts of equity in their homes can often use hard money loans to provide emergency funding until they find permanent refinancing options.
- Downpayments for Expensive Properties: Real estate opportunities come few and far between, and when they do appear it is vital for developers to seize the day. Many prime properties require large down payments to secure control, and sellers may demand these funds on short time frames. Hard money brokers can often finance these deals quickly and with little fuss, allowing savvy investors to take advantage of unexpected real estate opportunities.
A Caveat Concerning Hard Money Loans
Those planning to get hard money loans should be aware of possible issues that could arise. These issues include problems with repayment terms.
Since hard money loans often run into the tens of thousands of dollars and they also carry high-interest rates, it can be easy for loan recipients to fall behind on payments and find themselves in deep financial waters. If this happens, borrowers may find their collateral properties used to pay off delinquent loan amounts.
In order to forestall these very real possibilities, hard money loan hopefuls should carefully calculate their future payment amounts and realistically assess whether they will be able to repay their loans at the proposed interest rates. If not, it is in their best interests to negotiate rates and loan amounts that fit within their projected budgets. In addition to these steps, it is also important for applicants to work with reputable hard money loan brokers.
Working With the Right Hard Money Lender is a key to Success
While hard money borrowers should be careful, if they have worthy projects and they do their homework they can often find success in their endeavors. Doing this kind of homework partially involves locating honest and reasonable brokers.
Each state may have dozens or even hundreds of licensed hard money loan brokers, and many of them are also real estate brokers. As such, a good place for prospective loan applicants to start looking is with their local real estate brokerage associations.
These organizations can identify brokers who operate fairly and honestly, saving applicants much heartache in the process. Once applicants have a short list of possible brokers, they should look for any past or present financial legal issues associated with their chosen firms. Loan hopefuls should also take looks at the user or customers reviews from reputable review sites, as these can be valuable sources of real-world information. Finally, loan seekers should work with brokers who are interested in their projects and who offer them reasonable terms.