A hard money lender is usually a private individual who provides a loan to the borrower based on the value of the borrower’s real property. The hard money loan is not dependent on the credit rating or score of the borrower but on a certain percentage of the quick sale value of the collateral. Quick sale value means the amount that the property could be sold by the lender during a time span of one to four months in the event of a default. The common loan-to-value ratio allowed by the lender is from 60 to 70 percent of the quick sale value. Here, it should be noted that if the property will undergo certain changes such as repair, the hard money lender would base the loan on the value of the property after it has been repaired.
The requirements for the hard money financing will vary to a large extent because these will depend on how the hard money lender views the risk presented by the borrower. It will also depend on the attitude of the private investor and the relationship that the borrower has already established. In some cases, the lender may simply inspect the property but in other cases he or she may require the borrower to submit copies of tax returns.
Because private investors or individuals are usually the lenders of this kind of loan, the interest rates and fees that are charged are usually much bigger than those charged by banks and other conventional lenders. So, what are the benefits of a hard money loan? The two most important advantages of this type of loan is that a credit check is not usually conducted because the loan is secured by the collateral and the money is made available to the borrower in much less time than a bank loan.
Meanwhile, because of the high interest rates and fees charged by a hard money lender, they may not be allowed to operate in certain states that have strict usury laws. Nevertheless, the regulation of this particular industry varies widely from state to state. Also, some lenders may be companies that serve a specific regional market or the whole nation. Some are even represented by brokers who usually take a certain percentage of the loan for their services in preparing the documents that are required. Other fees may be added to the interests, such as application fees and prepayment penalties.