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In this day of economic upheaval where traditional commercial and lending institutions have tightened their lending requirements, and now take longer to come to a decision on whether they are going to supply money for a particular project, there is till a possibility to receive funds for investment purpose from people involved in hard money lending.

These people have been around for a very long time and generally focus on supporting real estate transactions in the area where they reside. They can supply funds to help someone obtain a piece of property that the traditional banking companies now steer away from, because they may be worried about the credit worthiness of the person asking for money, or they do not feel comfortable with the value or type of transaction taking place.

Other times, the sale has to be completed quickly in order to receive a good price, and normal banks simply take too long to come to a decision. The buyer knows he must move fast and will search other opportunities to get the cash he needs quickly.

When situation like these arise, some people will seek out local local investors, who specialize in putting together short term lending opportunities, and see if they would be interested in providing cash for them to complete the real estate deal. If the investors feel the opportunity, then they will often supply the funding needing.

One of the situations that occurs with great frequency now a days is the short sale transaction. Essentially, the original mortgage holder allows the person who had owned the property to sell it at below full value and less than what the mortgage amount is worth. The one seeking to buy it knows that this has to happen fast or they will lose the opportunity to gain control over the piece of real estate. The people lending the money in the new transaction places a value on the property. They will lend a certain amount and no more.

The people supplying the bulk of the money will want to get it back as quickly as possible and will charge an interest rate that makes it beneficial for the new owner to pay it off. They will normally charge anywhere from 10 percent up to 15 percent, and they often only allow terms of repayment to last for only six years at most.

Another factor that helps the one needing funds is that their credit worthiness is not a consideration when deciding to lend the funds. The lenders will focus strictly on the value of the property and supply funds to cover only a certain percentage of the value. This way if the person defaults, then they have a built in margin to recover their investment if they have to foreclose on the property and sell it. Usually they will only supply up to 70 percent of the value.

These types of non-traditional lending sources means that people can still find funds in a tight financial market to complete real estate deals. Without hard money lending, this might not happen otherwise.

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Corporate borrowers generally need to have liquidity but may well not meet the criteria for regular real-estate loans. Loans that are collateralized by home collateral are called hard money loans. A money lender is and person or business that grants these loans They’re happy to write a cheque immediately to the borrower once she or he is examined for credit risk.

Because the chance of default is much higher, hard money lenders charge higher rates of interest, and they’re the last collateralized lenders to get their money in a bankruptcy filing. Hard money loans are usually provided for just two thirds of the property’s appraised value in repaired condition. The borrowed funds contracts are written for short durations (sometimes called called bridge loans) while the property owner works out a more permanent financing situation or resolves the financial distress that prevents them from securing other financing. So more of these types of loan agreements end up in court to be contested if the borrower does not pay.

The high interest rate charged is to provide protection against the higher risk of default and the associated court costs with a default on a loan. Sometimes the interest rate can be high enough that certain localities enact usury laws which can effectively ban hard money lenders from operating.

Thus the lenders in the industry are highly local, highly segregated and small organizations due to local regulatory practices. Some oversight is provided to this unusual market by regulatory organizations which are few and mostly just known by professional real-estate financiers.

Loan sharks sometimes abuse the legitimate lending process by charging exorbitant rates of interest and pretending to be genuine hard money lenders. The victims of these kinds of lenders tend to be desperately in require of quick cash, and unsophisticated consumers who may not have the time to research the lenders or the technical understanding to know that they’ve signed their property as collateral to a 30% loan, perhaps with a quoted ARV lower than market, no prepayment allowed, or even worse lending terms.

Legitimate hard money lenders tend to charge rather high interest rates, however, the prime rate plus fifteen is common with five points on the borrowed funds. The rate a specific hard money lender will quote depends on the credit rating of the individual or company, the local real estate market for the type of property secured, local usury and bankruptcy laws, as well as the general availability of credit in the marketplace. Real-estate industry insiders usually know quite a few local hard money lenders and know how to shop around. Others with less experience should do a lot of research and fully understand what they’re getting into so they can find the best terms and get the best deal for their hard money loan.

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