The ultimate value of a mortgage broker comes in the form of providing choice to the consumer, and thus more opportunities to homeowners, even in the most dire of situations. Hard Money loans have often been associated in the same circles as predatory lenders, pay day loans, and unsavory characters who have fallen on hard times. But in reality, these programs can serve as the saving grace for a variety of innocuous situations, whether the borrowers are the unseasoned self-employed, foreign nationals, or simply in need of a bridge loan.
In terms of qualifying, the most important factor is equity. Lenders know that applicants typically have nowhere else to go because they are higher than normal credit risks. As such, they require significant collateral for security (30% or more) and will charge above-market interest rates and prepayment penalties as a cost for originating the loan. It is not uncommon to see rates in the 7-12% range.
Most Hard Money Lenders also prefer non-owner occupied or investment properties to better classify the transaction as one with a ‘business purpose’. The reason is to avoid the more rigid guidelines and protections involved with consumer purpose (residential) loans.
Some things to remember:
1. Make sure to plan ahead – shop for the best terms and make sure the lender commits to actually closing on time, particularly for purchase transactions.
2. If you are leveraging a primary home, there must be a business purpose, such as purchasing/funding a business, or investing in real estate.
3. Lenders will also require an exit strategy – ex. New job, or refinance due to changing circumstances.
4. Be careful of the prepayment penalty terms – which you can often buy down or buy up.
5. Think big picture. While interest rates are high, remember this is a short-term solution, usually to get over certain one-time hurdles.
When used appropriately, Hard Money loan can be a short-term catalyst for long-term home ownership. Consult your favorite mortgage broker today!