Hard Money Lenders

When an investor doesn't have great credit, hard money lenders can help him finance a loan. These investment professionals offer short term loans, also called bridge loans, for higher than normal interest rates. These bridge loans are based on the value of the real estate being collateralized for the loan. This type of financing usually comes at a higher than normal interest rates, because the borrowers do not fit the necessary requirements of standard financial institutions. This is not to say that these lending professionals have no required standards. Instead, they have requirements about loan to value percentage, type of real estate that is collateralized and minimum and maximum amounts that they will loan out.

Traditional credit guidelines are in place to protect banks and other financial institutions from the risk of default and foreclosure. These guidelines often include proving income, minimum acceptable credit score and length of employment. Because hard money lenders are foregoing these guidelines, the large interest rates help to pad them financially in the case of defaulting clients. This has proved wise, as defaults are much more common among bridge loan borrowers than they are for standard loans from banks or credit unions. This higher interest rate may still be better than not getting a loan at all due to poor credit, recent job loss or the lack of necessary documentation.

When seeking this type of financing, it is common to offer the real estate being purchased as collateral. However, it is acceptable to offer other forms of collateral as well. Hard money lenders typically require a smaller loan to value ratio, thus the amount a borrower can finance is smaller. For example, this sort of lender may require a sixty percent loan to value ratio, which means that it is only willing to lend sixty percent of the value of the real estate being purchased. This leaves the borrower to provide forty percent of the loan value. When forty percent is simply more than the borrower can pay, other property can also be collateralized to increase the loan amount. When real estate investors offer more than one piece of real estate to collateralize a bridge loan it is called cross collateralization.

There are regional and nationwide hard money lenders. They can either work directly with applicants or use brokers who prepare the documentation. In the cases when brokers are used, the broker will take a percentage of the profit (which is called points). These types of bridge loan financial professionals also may require an application fee and charge a prepayment penalty. These actions are all in an attempt to recoup some of the funds lost in the higher than normal default rate among their high risk clientele.

There are many regulations overseeing the business practices of hard money lenders. Two states, New Jersey and Tennessee, have usury laws that prohibit offering bridge loans entirely. However, the regulatory oversight of these businesses differs from state to state. There are also laws governing whether or not the loan can be to an individual or has to only be commercial. This is in an attempt to further protect individuals from defaulting due to the astronomically high interest rates.

Commercial hard money lenders are those whose clientele are strictly commercial investors, as opposed to individual home buyers. The collateral in these bridge loans is either commercial property or investment real estate. If additional collateral is needed to make up the difference in the loan to value ratio, then a residence can be used. Collateralizing a residence in conjunction with a commercial property to gain a higher loan amount is called a blanket mortgage. "The rich ruleth over the poor, and the borrower is servant to the lender." (Proverbs 22:7)

The aggressing lending practices of bridge loan professionals have given borrowers hope when all seemed to be lost. These types of loan professionals are so aggressive that they will lend to an individual who is currently in foreclosure, a person with a pipe dream of running their own business but has no personal investment value or a client who does not even qualify for a subprime loan. These scenarios are all too risky for standard financial institutions. However, with the increased interest rates and all of the fees and charges, the hard money lenders make a respectable profit from their line of business. They are typically private investors or small businesses willing to take a risk. If the fees are worthwhile and the interest rates are high enough to make the risk worth it, there are investors who are more than happy to put down the money for the loan. These individual lenders are hard to find, but brokers usually connect the borrowers who are in desperate need of the funds with investors willing to take the risk for the chance at a great profit margin.

Sometimes these types of loans are not sought because of default, but because of the regulations over banks and financial institutions. Banks are hesitant to lend money for housing that is nontraditional (uncommon framing or concrete block foundations) or individual residences that derive more of their value from the land than the house built on it. In these cases, merely being rural would necessitate seeking hard money lenders to build your residence. In addition, they will offer loans to those individuals in foreclosure. The borrower can use the money to pay off the original lender and take some more time to sell the property, rather than have a foreclosure on their permanent record. This would be especially helpful if someone lost their job, but then found employment. Their house would be in enough delinquency to prohibit paying the original loan down, but the new job would make paying the bridge loan payments a possibility.

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