Private Money used for loans that do not qualify for traditional loan programs.All available resources should be considered before entering into a hard money loan. Hard money lenders usually do not have much, if any, leniency towards payment due dates and their terms are usually not very favorable. However, hard money lenders may be the best, or only, option for some situations. They will lend you money when no body else will.
With hard money loans it is typical to pay anywhere from 2-6 points (or 2-6% of the loan amount).
Generally used by real estate investors who are buying properties that they intend to renovation and either resell or rent out, hard money loans are a good option for borrowers with a unusual scenario, i.e. extremly low credit score, only looking to keep the property a short time, need purchase and rehab money in one loan, etc. Hard money loans need to be high risk and therefore high cost loans, with average interest rates in the range of 13% or 14%. Most are short term loans (6 months on average) and are structured so that the borrower is only making interest payments during the course of the loan, with the whole principle amount due at the end of term. Credit Scores as low as 550 (depending on the lender), this can be a good alternative for borrowers who need short term money, but don't fit "cookie cutter" financing. However before entering a Hard Money Loan, the borrower needs to have the entire purchase planned out, including (most importantly) an exit strategy for the loan.
Hard Money Loans are also a great way to avoid foreclosure. Many times people lose the house that they have called home because of an illness or loss of job. Banks are typically not interested in forbearance agreements and usually will not refinance the borrower if their credit scores have dropped as a result of hard times. A Hard Money Loan can help the borrower to pay off the Bank and keep the house without being forced to sell it. All available financing options should be explored in these types of situations.
Hard Money Loans are for people with little or no credit at the time and little or no money. They carry high interest rates and heavy risk. But sometimes you just don't have a choice. It's better to pay those high rates than to lose your property.
A major down side to hard money loans is that they don't report to credit bureaus. Your timely payments won't show up on your credit report, and therefore you won't be building positive credit.
