Hard money lender real estate is one financing option borrowers with poor credit can utilize to purchase a home. Hard money loans are substantially more expensive than conventional home mortgage loans. This finance option should only be used on a short-term basis to help borrowers establish or rebuild their credit history.
Investors sometimes engage in hard money lender real estate financing to purchase commercial realty or properties intended for house flipping. Real estate investors sometimes use hard money loans to buy distressed properties. Homes that are not in marketable condition do not qualify for conventional mortgage loans offered through banks and credit unions.
Hard money real estate loans are commonly referred to as ‘bridge financing’ because they bridge the financial gap for buyers who cannot obtain funding through a service lender. Bridge financing can be used in conjunction with conventional loans and are often used in seller carry back mortgages.
Seller carry back is a finance option which helps buyers purchase real estate by combining hard money loans with conventional mortgage loans. The Seller provides partial financing for one or more years and the balance is financed through a mortgage lender.
For example, the property owner sells a home for $200,000 and carries back 40-percent of the financing, or $80,000. The buyer obtains bank financing for the remaining $120,000. The buyer has two mortgages against the real estate. The mortgage lender carries the first mortgage and the seller carries the second mortgage. Seller carry back financing is usually limited to a maximum of 70-percent of the property’s current market value.
Interest rates charged on hard money loans are considerably higher than interest applied to conventional mortgage loans. Hard money interest rates are regulated by state usury laws. On average, hard money lenders charge an interest rate of 11- to 21-percent.
Seller carry back trust deed contracts typically include default clauses allowing sellers to increase the rate of interest if borrowers become delinquent or default on the loan. Default interest rates can soar as high as 29-percent. Buyers considering hard money loans can determine the maximum interest rates charged by their state at UsuryLaw.com.
Bridge loan interest rates will vary depending on the amount of borrowed funds, as well as the funding source. Individual investors usually charge lower interest rates than real estate investment groups. Residential property is generally charged a higher rate of interest than commercial property hard money loans.
Hard money lender contracts oftentimes include a prepayment clause which penalizes borrowers who pay off their loan early. Since bridge loans are intended for short-term use, borrowers should attempt to refinance mortgages through a conventional lender as quickly as possible. While a six-month prepayment clause is acceptable, a two year prepayment clause is not. Always consult with a real estate lawyer before entering into hard money financing.
Hard money lender real estate loans are not the best financing option. However, bridge loans grant borrowers with poor credit the opportunity to buy a home and provide funds to real estate investors to purchase residential or commercial investment property.