Hard money Loan is a short term loan made against a physical asset such as a property. Primarily used in real estate transactions where the lender tends to be an individual not a bank.
Hard money loans are to be very short term, in the one to three year range whereas a tradition mortgage with a bank is in the ten to twenty five year range, they also tend to have a lower LTV (Loan To Value) ratio, something in the 50% to 70% range, than traditional bank mortgages.
Given that Hard Loans tend also to be more risky than traditional loans there is usually an interest rate premium, something from 3% to 10% above the normal interest rates.
One of the key advantages of a Hard Loan is the turnaround, because the loan is secured against a property there can be fewer checks on the credit background of the applicant, if all goes wrong with the repayments the lender can seize the property and regain their investment. This makes for a much quicker loan application process, but with an increased risk to the borrower.
One side effect of the Hard Loan is the default process, from the lenders perspective, if the borrower defaults there is the possibility that the property could be sold for more than the original loan, remember the lower LTV ratio?
This foreclosure facility offers the lender a chance at a bigger payday than just collecting the collateral and interest from the loan, this is why the approval process is so much faster than a traditional bank, the borrower’s ability to repay the loan is on much less importance than the collateral value.
The biggest risk in a hard money loan in Dallas is to the borrower, upon default and seizure of the asset. The original deposit made by the borrower is not refunded, that could be 30% to 50% of the initial price, dependent upon the original LTV of the Loan.
Another downside to Hard Loans is the type of property that is considered acceptable, because of various Acts (Think Dodd-Frank, the ‘Truth in Lending Act’ and HOEPA) after the 2009 mortgage crisis, there are multiple regulations surrounding the financing of primary residences.
This tends to exclude a primary residence from the Hard Loans arena because of the excessive paperwork and checks involved. Therefore Hard Loans tend to be used for business and ‘House flippers’ or for commercial properties.
The borrower should also be aware of the business or person that is providing the money, this type of lending is sometimes associated with ‘Loan Sharks’. Definitely not the type of lender any respectable person should be involved with. So do your homework, be sure who you are dealing with before turning over the deeds to you property as security against this type of Hard Money Loan.
Hard Loans are a viable option for people wishing to make a profit from investing, either as the borrower or as the Lender, you just need to be aware of the pitfalls and who you are dealing with.