The Loan of Last Resort

Sometimes borrowers have their back against the wall and their only source of finance is a property with a lot of equity. Hard money loans can be used to save a property from being seized by the IRS or by being foreclosed-on. It can be used to satisfy an urgent business debt, or a medical emergency. Sometimes the benefit of a hard money loan can outweigh the high cost.

Hard Money loans are sometimes referred to as Equity Loans because they are usually based strictly on the equity in a property. As long as there is sufficient equity in a property, a hard money loan can potentially be found. Hard money lenders don’t consider a borrower’s income or credit or assets when making a loan decision and often times the approval process takes only a few days. Sometimes hard money loans are considered a “loan of last resort” because the interest rate and fees are substantially higher than conventional loans, but they are made when people need to pull out money as quickly as possible to pay things like marital claims or tax liens.

What a Hard Money Loan Looks Like

When a hard money loan is mentioned, one conjures up images of a Mafioso in a dark suit with a violin case. The fact is, most hard money loans are made by professional individuals with clients such as doctors and retirees who are looking for a secure, high-return, on their investment.

Hard money loans are usually made where there is substantial equity in a property. The type of property usually doesn’t matter. It can be raw land or a storefront or a four-unit apartment building. The maximum loan-to-value on a hard money loan usually doesn’t exceed 60 percent. The loan-to-value is the percentage that a loan represents against the appraised value of a property. For example, if a loan is $75,000 and the property is worth $200,000 the loan to value would be 38 percent ($75,000 divided by $200,000.)

The owner might have horrible credit, be behind by three months on his mortgage payments and have multiple tax liens, but as long as the loan-to-value is below 60-percent, the hard money lender will make the loan.

Hard money loans are also written for a shorter term than conventional loans. This is usually three to seven years but will vary from lender to lender. The payments are usually interest only, which means no principle is repaid during the loan term. The payment calculation for an interest only loan is the loan amount times the annual interest rate, divided by 12. For example, if the loan amount is $60,000 and the interest rate is 14 percent, the interest only monthly payment would be $700 ($60,000 times 14 percent, divided by 12.) During the loan term, the borrower would make a payment of $700 each month, and at the end of the term (say 5 years), the entire principle balance would be due.

Interest Rates and Loan Costs

The fees and loan costs on a hard money loan are much higher than traditional financing. For example, if the going rate on conventional mortgages is running at 5 percent at a cost of one point, a hard money loan might be at 18 percent and cost ten points (a point equals one percent of the loan amount.) This means that a $50,000 hard money loan costing ten points, would have a cost of $5,000 ($50,000 times ten percent.)

Hard Money Appraisals

Since hard money loans are based on the equity in the property, the appraisal is the most important thing the lender will look at when making a loan decision. Often in hard money loans, the lender will require two appraisals to support the value of the property. This cost usually has to be paid by the borrower in advance. This is usually the only item that will hold-up the approval process. When the appraisal(s) are complete, the hard money lender will usually make a decision within a day or two.

How to Find a Hard Money Lender

Most hard money lenders advertise loans that don’t require income or credit verification and that can close in as little as seven days. They can be found in most search engines by using the description: “Hard Money Lenders” or simply “Equity Loans.” Typically, hard money lenders will take an application over the phone or on-line and, if interested, they will order an appraisal with an appraiser or appraisal company they are familiar with.

See if you qualify for a hard money loan.

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