Hard money lender real estate financing offers buyers with bad credit the opportunity to buy a home. Hard money home loans are substantially more costly than conventional loans financed through banks. They are intended to be used as short term financing while borrowers establish or rebuild their credit history.
Hard money lender real estate loans are sometimes used by real estate investors to purchase commercial properties or real estate intended for house flipping. Investors often use hard money loans to purchase properties which are not in marketable condition and do not qualify for conventional financing.
Bad credit loans are often referred to as ‘bridge financing’ because they bridge the financial gap for borrowers who cannot obtain funding through a mortgage financier. Bridge loans can be used in combination with conventional loans and commonly used with seller carry back mortgages.
Seller carry back is a finance option which helps borrowers purchase real estate by combining hard money loans with conventional mortgage loans. Sellers provide a portion of financing for a short period of time; generally one to two years. The balance is financed through a mortgage lender, bank or credit union.
For example, the property owner is selling real estate for $250,000 and carries 40-percent of the financing, or $100,000. The buyer obtains financing for the $150,000 balance through a conventional lending source. The lender holds the first mortgage and the seller holds the second mortgage. Hard money real estate financing is usually limited to a maximum of 70-percent of the property’s current market value.
Bridge loan interest rates are usually much higher than conventional home mortgage loans. The rate of interest charged through private financing is regulated by state usury laws. Hard money loans typically carry an interest rate between 11 and 21-percent. Florida has the highest usury interest rate which is capped at 25-percent.
Most hard money loan contracts include a default clause allowing lenders to charge a higher rate of interest if borrowers are delinquent with payments or default on the mortgage note and enter into foreclosure. Some states allow default interest rates as high as 29-percent. A list of state usury laws is available at UsuryLaw.com.
The interest rate charged with real estate bridge loans can also vary depending on the amount of funds borrowed, as well as the funding source. Hard money loans obtained through a private investor are oftentimes lower than rates charged by a large investment group. Home mortgage loans are generally charged higher interest rates than commercial real estate loans.
Hard money lender real estate loans might include a prepayment clause which penalizes borrowers for paying the loan off early. The primary goal is to refinance bridge loans through a conventional lender as quickly as possible. While a six month prepayment clause is tolerable, a two year penalty clause is not. It is strongly recommended to consult with a real estate attorney prior to entering into hard money lending agreements.
Generally speaking, hard money real estate loans are not the best financing option. However, bridge loans do allow borrowers with less than perfect credit to participate in homeownership and provide funds to real estate investors for commercial and residential investment property.
