Hard money is easy to find
A whole other world lurks just below the surface of mainstream real-estate finance, a world that most people don’t know about. Called “hard money” lending, the field is no longer dominated by the loan sharks who used to feed in these waters. Nevertheless, it remains a largely unregulated segment of the market, so would-be borrowers should swim with extreme caution.
No one knows for sure where the term “hard money” comes from. Some surmise it stems from the so-called “hard guys” who once lent money at extremely high rates and with onerous terms – and threatened to break your neck if you didn’t pay it back. Others believe it means this kind of money is hard to come by. Whatever the origin, neither is the case anymore. Nowadays, there are plenty of legitimate lenders in the hard-money sector. So many, in fact, that finding cash at a moment’s notice is not difficult at all. Moreover, rates and terms, though still hefty enough to make most borrowers blush, are not nearly as onerous as they once were. “There is a tremendous amount of money available right now,” says hard-money Marketer Michael Goldstein, president of PMB Inc. So much so, he says, that lenders’ “yields have been greatly reduced.”
One of the reasons you may never have heard of hard money, or private money, is that it’s mainly for folks who usually have nowhere else to turn. This is the sector of the business where even sub-prime lenders who cater to borrowers with poor credit scores fear to tread. Indeed, in this market, practically anything goes, and usually does. Credit score under 500? No problem. Bankruptcy or foreclosure in your credit file? Doesn’t matter. Unpaid charge-offs? Not a big deal. Don’t – or can’t – document your income? So what? Poor work history? Who cares? As long as there is enough equity in the property – that is, as long as the lender could sell the place within a reasonable time for more than enough to cover the loan amount – and you have the ability to pay him back, you can probably find a hard-money lender willing to strike a deal. “The underwriting criteria is totally different” from regular lending, says Steven Sussman of Florida Realty & Management Corp. in Miami. “We look at equity, not the borrower. I don’t even know how to read a credit report.”
Typically, a hard-money loan is used as a stopgap measure, giving the borrower enough time to correct a financial problem. Perhaps you need cash to pay off a mortgage in foreclosure, or maybe you’re out of work and need some money to hold you over until you find another job. But this type of mortgage isn’t limited just to financially troubled borrowers. Hard-money lenders also deal with divorcees who might need cash to buy out their spouses’ share of the former family home, heirs who need money to live on until the estate is liquidated, people who need some seed money to start a new business, investors who need money fast to cash in on a great deal or folks who need cash to get their homes ready to sell.
Here’s another familiar scenario: The house you’ve been eyeing for years just came on the market, but you haven’t even begun to put your current place up for sale. Still, you need money now. A conventional lender will take weeks, even months, to finalize a loan, but a hard-money lender can put a deal together in just a few days, if not hours. Whatever the reason someone would consider a hard-money lender, the cost can be substantial. Rates can range from 8 percent to 16 percent or higher in some cases, depending on what conventional lenders are charging, and points – the fee lenders charge to make a loan – run from 2 to 8 or more. (A point is 1 percent of the loan amount.) The length of the loans can be as long as five or six years, but just one or two years is typical. And the loan amount will usually be no more than 65 percent of the property’s value.
No wonder these are lenders of last resort. And no wonder anyone considering such financing should move slowly. Speed may be of the essence, but take the time to call several lenders, not just one, and consider their terms carefully. The same deal that’s on the table today will be on the table tomorrow and the next day. “Even if your back is against the wall, it’s still worth calling two or three places and their references,. “There are enough lenders competing for loans that you have plenty of time to do your homework.”
Next, be careful whom you deal with. Mortgage brokers who act as hard-money lenders or as agents of such lenders are usually regulated on the state level, but private individuals often are not. Moreover, federal protections regarding high-interest rate loans don’t apply, unless the loan term is at least five years. Check out any potential lender with your local better-business bureau and your state or county consumer-affairs agency. Call your state-banking department to determine if the lender’s license is current and that there are no charges pending against the company. Also, determine if your lender is a member of a professional trade organization. Membership is no guarantee that the lender is on the up-and-up, of course. But peer pressure and educational opportunities that come with joining such groups work in your favor. Nonmembers “are less likely to learn what laws apply and less likely to comply,” .
Once you’ve gotten this far, it’s time to consider the loan itself. First, borrow only what you need and not a penny more. Hard-money loans “are nothing more than Band-Aids,” advises most lenders. “So borrow only what you need to get you over your problem.” “Get a small, temporary loan that’s just enough to meet your needs,”. “
You can’t get into as much trouble with a small loan as you can a big one, and you can always follow up with a larger loan to pay off the smaller one, after you solve your immediate issue.” Try to go with the shortest term possible, too, because the shorter the term, the less expensive the loan. And avoid prepayment penalties that fine you if you pay off the loan early. And finally, never, ever sign over title to your property to the lender. It is the collateral that stands behind the loan, but it should remain yours until you decide to sell. Only then should you give up your rights, not before.
Did that scare you? Those were the days of past. Now days rates are like sub prime were before and most hard money lenders just want to lend you what you need and get paid back. Just check out the lenders on the site.