There are hard to find. That is why they are… - Posted by Dr. Craig Whisler CA
Posted by Dr. Craig Whisler CA on March 22, 2002 at 12:44:08:
…called hard money lenders (:
Gerry, just look in any large newspaper or in the phone book in medium size or larger towns. Look under LOANS. You are about the 5th or 6th person to ask me this question. When this happens I stop and wonder what is wrong with my posts about hard money lenders that causes people to ask the same question over and over. It is clear that I am missing something. Now after a little reflection I guess I know why I haven’t been giving an adequate explaination. Hard money loans simple are not called hard money loans in ads. Gerry your questions are helping me learn to write more clearly and are greatly apprciated.
Hard money lenders can be identified by such terms in their ads as “No Qualifying” or “No Credit Needed” or We make C and D loans (means loans to people with weak or poor credit) or “We loan based on equity only” or "No job needed, or bankruptcy or past credit history no problem. Sounds like a borrowers dream right? Well read on before deciding for your self. The pros and cons are about equally divided.
You can also phone anyone who describes himself as a loan broker and ask for a referal to a few hard money lenders. Brokers use borrowed money from many different sources to loan to you and collect a commission called points and/or loan origination fees.
Most hard money loan brokers act as a channel for small private parties who want to loan money at a higher interest rate.
Since you must have 30%-40% equity in the property over and above the loan, these loans are generally quite secure, even when made to people with poor credit histories. These lenders don’t reallly care if you pay or not because if you don’t pay they can foreclose the loan and take your property. They can make more money off your equity than any other way so they don’t mind if they have to foreclose, hense no need for credit.
You can often get hard money loans for less desireable properties such as on older mobiles on private land in scroungier neighborhoods. The lenders take more risk and expect and are entitled to a higher return.
Hard money loans usually carry from 5-20 points and sometimes additional loan origination fees. They also have two other drawbacks that must be considered. They carry much higher interest rates such at 12%-15% and are usually of very short duration such as 2-5 years. For these reasons they should not be used whenever you can get a better loan based on good credit. Because of the short repayment period and the high payments necessitated by the high points and loan fees I would not be so quick to use a hard money loan for anything except either quick flip fixer uppers that have a high profit built in OR for permanent financing on properties that have a very high positive cash flow such as low priced mobile home land/mobile combinations. The reason for the latter is simply that if you buy a property that can amortize its loan fully from rents in 2-3 years, you will have more than enough cash income to support the highter payments of a hard money loan. Hard money loans are the easiest to get of all loans BUT you must be a very good buyer to be able to buy property 30%-40% below market. This is easiest to do with distress sellers of mobile home/land properties, and in other than first class neighborhoods.
Hard money loans usually have NO personal liability. If not, insist on it during negotiations. No personal liability simply means that there will be a (Santa) clause in your loan agreement that says something like “The property securing this loan shall be the sole recourse in the event of default” That way if you can’t pay, the lender takes back the property and gets your YOUR equity for HIS lunch. He can’t sue you for any other money or reason and perhaps get a default judgment against you, which could be used to levy on or attach any other unrelated property or assets you may own. I love this no personal liability clause. Don’t make loan guarantees when you can avoid doing so. I would rather pay more interest and points in most cases that to have personal liability for many loans. Just look at what happened to Donald Trump and thousands of others during recent downturns in the real estate market. I would prefer a 7%-8% interest 30 year loan to hard money any day if I have a choice. With some property you just don’t have such a choice. I can usually apply for a hard money loan with lenders who know me, by telephone, and after a five day waiting period I can go pick up my check on the 6th day. If speed is the most important factor a hard money loan can be advantageous.
Regards doc. email@example.com