Hard money is the most common term for private loan money, and it typically comes from a source that specialises in structuring such loans. A hard money loan is frequently made up of a first mortgage on a home, resulting in hard money residential loans. Private lending capital that is pointed to as a hard money loan has a host of distinguishing characteristics.
As an example, as previously said, it is normally a first mortgage. Since the amount of equity in the property is more important than the borrower’s credit, a first would effectively protect the whole property from being lost if, for example, another loan is “ahead” of the hard money loan.You can get additional information at Houston hard money loans.
The explanation why a borrower’s credit doesn’t matter much for a private loan is because the lender looks to the property for protection, and the lender is compensated handsomely for taking a risk by basing the whole loan on the property valuation alone.
Another characteristic of a hard money lender is that they often charge very high interest rates and fees. Those high points can be rolled into the real loan if the property is safe enough. The debt is often not charged in the traditional Principle + Interest (PI) format, but rather as interest only with a balloon payment at the end of the loan term. In this way, the homeowner is effectively paying interest on interest, so points are interest, and the debt could have been measured with points included, because any payment the creditor receives, paying only interest, is effectively interest on interest.
Many hard money lenders need a thorough valuation of the land. This is seen once again as part of the security sought by the private loan money lender.
The Loan to Value Ratio (LTV) is the proportion of the loan against the actual valuation of the property that the lender would consider. A 70/30 LTV on a $100,000 property, for example, means that the lender would lend $70,000 towards the property.
Continuing with this scenario, let’s say the hard money residential debt on the property is $70,000, and the offer would net the lender 5 points at a 12% interest rate, payable interest only. In two years, the full debt will be due and payable.
The value of 5 points is $3,500. ($70,000 X.05), and at a rate of 12% per year, the lender will collect payments of ($70,000 X.12 = $8,400 a year separated by 12 months = $700 per month). For the next two years, you’ll pay $700 a month. Keep in mind the points are earned at the time the loan is finalised. In just two years, the lender would have made $3,500 + $8,400 + $8,400 = $29,300 in interest alone. You can probably see that people liked to make hard money residential loans!
However, several hard money lenders took a hit when home prices plummeted too fast. For a loss of about 40% of the initial appraised valuation, the landlord may still go into foreclosure, which would cost at least $8,000, and eviction proceedings, which would cost only $1,000, because they would then pay for renovations to the home, which the evicted occupant might have fully trashed, as well as any outstanding taxes.
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