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Hard money loans began in the 1950's with the advent of quantitatively scored credit applications. These standardized scores brought about set credit score levels that were considered to be an acceptable risk for conventional lending institutions. What was a consumer with insufficient credit to do? Hard money lenders stepped in and offered consumers the option of borrowing capital in the form of a hard money loan.
What Makes A Hard Money Loan Different From Traditional Loans?
Hard money loans are financed privately by an individual or a small group, not a federally secured financial institution. Hard money loans are not awarded based on an individual’s credit score, instead, personal property or real estate is used to secure the loan. The loan is generally taken out for a short period of time, with strict loan repayment terms and at a much higher percentage rate than a traditional loan.
What Are The Advantages Of A Hard Money Loan?
These loans are useful for individuals who have poor credit or an insufficient level of established credit. While a traditional loan may take thirty days or longer to process, a hard money loan can provide a consumer with funds in as little as seven days. Each loan is evaluated separately, and consumers deal directly with the lender.
What Kinds Of Investments Make Good Candidates For Hard Money Loans?
Consumers often seek a hard money loan to purchase a property that they intend to fix up and resell quickly. Hard money loans can be used to bail a property out of foreclosure status or provide funding for an overextended construction budget.
What Should Consumers Consider Before Choosing A Hard Money Loan?
It is important to note that hard money lenders generally do not loan the full value of an item used for collateral. The consumer must put up an average of 30-40% of the value of the mortgaged monetary amount. When the consumer invests their own capital in the venture, there is an increased likelihood of the loan coming to fruition instead of foreclosure.
Hard money loans are extended for a short period of time, usually six months to five years. They are often referred to as a bridge loan for this reason. They are not intended to be a permanent solution, only a quick fix.
Hard money lenders make a profit by charging a high percentage rate and hefty origination fees. It is not unusual for a hard money loan recipient to pay twice the interest that would be charged by a conventional lender. The average rate for a hard money loan is between 12% and 18% interest and two to ten points are charged for the origination fee.
Hard money lenders are not shady characters who employ a group of thugs to come break the legs of those who don’t make their loan payments on time. They are business men and women who capitalize on a consumer’s need for fast cash. Hard money loans are not for everyone, but they can be used as a profitable money making tool in the right circumstances.
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