A Private Money lender provides short-term loans to individuals purchasing residential or commercial real estate. This financing is also available for land purchases. Investors use hard-money lenders to acquire investment properties relatively quickly. Hard-money lenders are considered private lenders, and do not use conventional standards to extend credit to borrowers. A borrower uses a hard-money loan as a temporary, short-term loan solution until he can acquire more conventional financing for the property.
Customary loans from financial institutions evaluate a borrower’s creditworthiness based on a borrower’s income, debt and credit history. Hard-money lenders rely heavily on the value of the property to determine lending standards. Because a hard-money loan is typically easier to acquire than traditional financing, the cost of the loan is considerably higher.
Hard-money loans are a good option for an investor who needs to acquire a property quickly or cannot get traditional financing. In addition, people with impaired credit who need money fast and can pay the high cost of borrowing are good candidates for hard-money loans. This type of loan may also be a viable option for individuals looking to avoid foreclosure. These individuals have turned their financial situation around, but still need cash to stop the foreclosure or at least get some additional time to sell the property. Foreclosure borrowers typically need to have at least 30 to 40 percent equity in their property to even qualify.
Since-hard money lenders are private lenders, their money comes from a variety of sources. Some hard-money lenders lend other people’s money, the same as a conventional financing institution. These small lenders use private individuals’ money to lend to investors and other borrowers who can’t qualify for traditional financing, and promise a high rate of return to the investor. Other hard-money lenders take on the lending responsibilities themselves, finding borrowers who are interested in financing and willing to provide a certain rate of return.
A typical hard-money lender will lend, on average, 65 percent of the after-repaired value of a property. The hard-money loan has to be in the first lien position, So individuals looking to borrow money to prevent foreclosure will have to borrow enough to pay off their original lender. Hard-money lenders only offer short-term loans that have a maximum loan term of two to three years.
The cost to borrow hard money is high, with interest rates ranging from 12 to 18 percent. The interest rate is based on how risky the lender feels the borrower is, based on experience, amount of assets and level of current debt. As with any traditional loan, there are also closing costs associated with hard-money loans. Hard-money lenders will charge anywhere from 2 to 10 points to obtain the loan. One point is 1 percent of the loan amount.