Although the hard moneylenders were largely affected when real estate industry crashed in the 80's, recent credit crunch has brought more business to this sector. People who are in need of loans are turning towards hard money loans after the financing by traditional lenders and banks has come to a halt. The casualness and irresponsibility of these banks and lenders when giving out loans in the past has hit them hard and they are going through a severe liquidity crisis. With this serious drop in supply for finances, hard moneylenders are seen as a reasonable alternative. People and businesses are short of funds, and naturally they have to go for the best substitute available. A hard money loan comes as a last resort in such situations.
Characteristics of a hard money loan:
Hard money loan goes by the principles of mortgage; the distinguishing characteristics are the interest rate and the time consumed in approval. A loan application can take quite some time before getting through all the procedures and verification process that are part of a bank policy. Whereas hard money loans are issued normally by private lenders (though you can find many commercial hard money lenders as well) in relatively short time at higher interest rates and lower loan to value (LTV) ratio. The interest rate or loan to value ratio is not fixed and it keeps changing with the ups and down of real estate market. Hard money loans are often for short period of time (also known as bridge loans) that means the correct quick-sale valuation of the property is vital for the lenders.
Some tips for the borrowers and lenders:
As a borrower, you need some extra efforts to convince hard money lenders (these extra efforts are compensated by their fast approval time, once they are convinced), a hard money lender will believe you more if you are ready to put your cash into the deal as well. This is why they emphasize on low LTV ratio more than your previous credit score when compared to traditional lenders. Along with the advantage of their availability in even hard financial times, they are a much better option when you need quick finance. Being a lender, you should be extremely careful when determining the current value of property. Over estimation or wrong valuation can cause you serious loss in case of default. Also borrowers should try to reach hard moneylenders themselves, without bringing too many agents and brokers in between, as it will save them lots of upfront costs and expenses.
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