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Are Hard Money Lenders Right For You?

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Hard Money Lenders or Soft Money Lenders - Which Are Best?

To understand what hard money lenders are all about, we must first understand what the terms hard money and soft money mean. (To be very clear, we are NOT discussing soft money as it relates to politics or political party financing.)

Soft money usually comes from institutional lenders such as banks, trust companies or large insurance companies to name a few. Their lending guidelines are more stringent and rigid, but they usually have more latitude with the terms of a mortgage or loan. These conventional or conforming lenders cater to borrowers with excellent credit history and the ability to document income.

Hard money is available through private lending companies, with access to private funds. Today, hard money comes in a variety of flavors, with one of the most common being mortgages.

Hard Money Lenders will get more deeply involved in assessing your ability to repay a loan than most conventional lenders. They will evaluate your track record as well as the potential of your current plans, whether that be to pay off debt or to convert or improve the property. They may also consider your personal guarantee or any other collateral you may provide.

Since hard money lenders are looking for maximum return, they are willing to take more risk for this return in the form of more relaxed lending standards.

They will usually give a loan for between 50%-75% (65% is most common) of the value of the property (after repairs or renovations). Interest rates charged will be a bit higher than conventional mortgage rates. Loans can be arranged for periods between 6 months and five years.

Hard money lenders tend to make first or small second position loans and are more willing to lend a higher proportion of the property's value than soft money lenders.

Who Could Benefit From Using Hard Money Lenders?

Borrowers who have low credit scores, or who have properties that do not fit conventional mortgage requirements of soft money lenders (banks etc.), may benefit from a hard money loan. Also, someone whose is facing foreclosure on their home or an investor who has come across a great deal but must act quickly to get it, generally could not depend upon a bank or mortgage company to meet their needs in the time required. Hard money financing home improvements are also a good example of this kind of lending.

As well as your credit score, other important factors for approval include:

  • your payment history for mortgage and revolving accounts over the last 24 months
  • your debt-to-income ratio
  • your employment history
  • amount of your down payment (if purchasing)
  • the amount of your liquid reserves, if any

If you should default on the loan, the hard money lender is the first creditor to be paid when the property is sold. The loan will have that provision included in the terms of the agreement, so review all paperwork carefully.

Another provision in the agreement with most hard money loans is a pre-payment penalty. A penalty will be charged if you refinance or pay off the mortgage/loan before a given amount of time. Again, read the fine print.

Contrary to popular belief hard money lenders are not hard to work with. As well as arranging any type of conventional loan, most mortgage brokers have a list of hard money lenders as well.


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