money' lenders: The source for last-resort loans|
Michael D. Larson Bankrate.com||
Would you lend
to a borrower in foreclosure? Or someone looking to buy a large ranch whose value
couldn't accurately be determined with a standard appraisal? How about refinancing
someone's mortgage so the person can take out hundreds of thousands of dollars
For "hard money" lenders, it's all in a day's
work. These private individuals and small local companies operate where even subprime
lenders fear to tread, making loans to the desperate and needy the same way regular
banks and brokers service traditional customers. They're harder to find than mainstream
lenders and they don't come cheap. But they can help hard-luck borrowers make
bad situations better -- and sometimes, they're a consumer's only choice.
are private investors who, if the interest rate is high enough and the perceived
risk is low enough, they will put the money up," says Pam Strickland, owner of
Mortgage Consulting Services in Santa Barbara, Calif.
and other intermediaries who arrange hard money -- or private money -- loans "go
to people who have money to lend and they match them up with people who can't
get money any other way," Strickland says.
buying the 'hard' way
If that sounds a little like how the Mob works,
don't worry. Hard money lenders aren't loan sharks who break borrowers' kneecaps
when they can't repay. At the same time, these lenders aren't your Granny Sue.
They charge interest rates and fees that would make conventional borrowers cringe
and often base lending decisions on whether there will be enough equity in their
subject homes that they can foreclose and still turn a profit. But private money
fills a niche in mortgage lending, helping consumers who have specialized needs
or too many credit problems to get conventional financing.
across the board," says Brandon Thompson, a private money broker in Denver. "You'll
see anything from a $70,000 foreclosure to a half-a-million-dollar loan, where
somebody just needs so much cash out and can't verify their income to make it
worthwhile for a traditional lender to look at."
instance, Strickland says one of her hard money lender friends recently did a
construction loan for someone building a cabin near Yosemite National Park. Regular
lenders balk at such deals because they don't like financing properties in remote
locations or those that aren't of standard frame, concrete block or other traditional-type
construction. Rural buyers sometimes use hard money loans, too. That's because
conventional lenders get antsy about mortgages for properties that derive a substantial
portion of their value from the land rather than the house.
of expensive properties and those who already own such homes and want to cash
out large amounts of their equity via refinance loans also turn to private money.
So do real estate investors. These buyers purchase properties on the cheap, fix
them up and sell them for profit. They use private loans because the loans come
with less red tape and restrictions than bank loans.
facing foreclosure make up the last major category of hard money customers. When
someone misses a mortgage payment, that person usually has some leeway to bring
the loan current. But once a 30-day delinquency turns into a 120-day or 180-day
one, the lender will usually start the foreclosure process. At that point, the
borrower is so far behind that even subprime lenders are reluctant to come in,
refinance the loan and start the clock ticking again.