money' lenders: The source for last-resort loans|
A hard money
lender, on the other hand, may be willing to give that person a new loan. The
customer can use it to pay off the original lender, gaining enough time to sell
the property and find a new place to live. Borrowers who miss payments because
of temporary problems, such as a job loss, can benefit, too. They can use the
breathing room a hard money loan provides to rebuild their credit. By making payments
on time for a year or two, they'll lay the groundwork for a future refinance into
a more favorable loan.
"These are temporary fix loans. That's all
they are -- to help people get out of a bad situation," says Kirk Johnson, a mortgage
broker with Sierra Funding Corp. in Denver. If
you find one -- be prepared to pay
That said, hard money borrowers
face a steep hill to climb. For starters, hard money lenders can be difficult
to find. Most operate only within limited geographical areas because they like
to see the properties they're lending against personally and know the area around
them. Borrowers can try calling around to various mortgage brokers, some of whom
have private investors who do hard money loans or know of people who do. Or, they
can check their local newspaper's classified advertisement section. Many papers
have listings that read something like this: "Can't get a loan? Call Us. Private
Customers who can find a hard
money lender shouldn't expect to be offered grade-A terms, though. Private money
mortgages typically have rates well into the double-digits and often come with
several upfront points. People who don't own at least 30 percent or 40 percent
of their homes probably won't even be able to get a loan. That's because hard
money lenders limit borrowers' loan-to-value ratios so they can still make money
off their properties if they have to foreclose. Consumers need to watch out for
"loan-to-own" predators, too. They structure hard money loans in such ways that
borrowers inevitably fail just so they can take possession of their homes and
profit off their sale.
"It's kind of the same
rules you get on any loan -- clearly understand what it is you're getting into.
Understand what the fees are and what the actual cost of the money is to you,"
Thompson says. "Be smart."
Despite the pitfalls,
lenders say that hard money loans can provide borrowers a lifeline in times of
need. Consumers just need to make sure their loans will help get them out of debt,
not bury them even further.
"If a property in
a subdivision is worth $100,000, the loan-to-value on a hard money loan may be
50 percent to 65 percent, so maybe $65,000 maximum on a first mortgage is loaned
against the property" to pay off the old lender who's preparing to foreclose,
says Robin Snyder, president of Mortgage Bankers Ltd.
"That does not mean that that customer
can't take the property and sell it tomorrow for $100,000 and reap the benefits
of that additional $35,000," he adds. "A person is better off paying 14 percent,
or a higher rate than the normal rate of 9 or 10, to keep the property rather
than lose it. Or say you don't get $100,000 for it, you get 90. Ninety is better
money' loan costs and terms
Kirk Johnson, mortgage broker, Sierra Funding Corp.;
Robin Snyder, president,
Mortgage Bankers, Ltd.; Brandon Thompson, private money broker.