Sub Prime simply means less than prime. You will be given a less than prime rate when you do not qualify for the best rates that you hear advertised all the time. It may be because your credit is not good enough or your income is to low for your amount of debt, or you have not been on your job long enough etc…
A hard money loan will be a loan for a short period of time. A sub-prime loan can be up to 30 years.
Sub-prime is also known as non-conforming. Non-conforming simply means that the loan did not conform with Fannie Mae/Freddie Mac guidelines.
I know what an investor is, and understand what a partner is, but can someone help me understand what the difference is between them and the true definition of the term: Hard Money Lender?
Thank you,
Henry.
A Hard money lender should primarily be used for rehab deals because they are expensive to use. But they are easy enough to deal with that makes them convienent to use. A TRUE Hard Money Lender will not be interested in your income. They are buying into the property not you. They will lend 65% of the ARV (AFTER REPAIR VALUE). Which means that your purchase price, repair amount and closing cost should fit into the 65% ARV. Most lenders will low ball the appraisal to protect themselves, but if you find the right deals you can still make good money. They generally will charge between 5-10 points on each deal. You also can expect between 15%-18% interest rates with interest only payments set up on a 1 or 2 year baloon with a 30year amortization. So your object should be to get the house, repair it and sale or refinance into a lower rate as soon as possible.
The only reasoning I can see for them being called hard money is because it is expensive money that you borrow, not anything like a regular loan with 1-2 points and single digit interest rates.
A true hard money lender lends on the basis of the asset. They don’t care about your income or credit. As long as they have enough security in the property they will loan money on it regardless of who you are. The most they will loan is usually up to 70% of it’s “as is” value with 65% being the most common. If you don’t pay them back they know they will get their money back and usually still make a profit because of the equity left in the property.
If your borrowing hard money and the lender wants to know about your income or credit then they’re not a true hard money lender. They should only be concerned with the value of the property Vs. the amount they are loaning you on it. That’s why they get the high interest rate and points for doing these types of loans.
Excellent description.
So then, is “sub prime” a lender who DOES look
at the borrower’s credit, job, etc. and a
hard money lender just looks to the property.
And what are those differences, just out of curiosity?
Terms tend to take on a life of their own.
That is, words take on a life of their own.
Posted by George(OH) on March 20, 2000 at 14:41:51:
the “hard” in “hard money lender” came from the fact that they instead of loaning against something like credit, employment history, things that are more abstract - that they loaned against the property itself, which is physical, hence the name “hard”?
We all know I’m a pre-newbie, so please correct me if I completely bungled this up.
I don’t know if you were serious, but that is simply not true. Many people with good credit use hard money lenders. A bank is not as flexible and simply will not loan money on your typical fixxer-upper. These same people can however turn around in a month or two when repairs are complete and refinance to a decent rate and take cash out. Some people who could use their own cash simply choose not too so they do not tie their cash up when someone else will gladly do so.
Hard Money Lenders will look to the property because they know they are well secured because of the lower LTV (loan to value) they loan against. Usually these are short term loans.
A sub prime lender is a lender who loans to borrowers with credit problems. Your credit rating will play a major roll in how much interest they will charge you, how many points, etc. Usually these types of loans are for longer terms. They can range from a 30 year fixed to a 30 year amortization with a 5, 7, year balloon, to a 30 year adj. rate mortgage. Sub prime lenders will also loan a higher LTV depending on your credit rating. They usually have a number of loan programs available to fit all types of borrowers. Since about 5 out of 7 people have some sort of credit dings, this has created a hugh market for these types of lenders. In exchange for taking on more risks with borrowers that have credit problems, they charge higher fees, points, and interest rates.