One gets a hard money/private money loan for a few main reasons:
- Your credit is not good enough for a conventional loan.
- You need cash quickly (conventional loans average 30 days).
- The property or home you are buying does not qualify for an FHA or other conventional loan in that it needs some renovating/fixes.
As a Hard Money lender for the last 20 years I have been asked many, many times – “Is that a good loan?” Initially I would do the analysis of the house payment compared to 30 year fixed rates and the costs divided by the number of years they’d have the loan, blah, blah, blah. Finally I just told them the simple truth, if it’s the only loan you can get. That’s a good loan.
I’m not being flip here, but when your home loan application has been turned down by the 30 year fixed rate lenders, the credit union, the bank you’ve been at for umpteen years and your family won’t loan you money, the truth is the only program left is hard money. And that requires you have equity and an ability to repay the loan (if it’s your principal residence) or a down payment if the loan is to buy a principal residence.
As of this date 2012, the lending standards nationwide have become so overly restrictive that to get a loan almost requires an act of Congress. In actuality that is not far from the truth as the federal government now owns most of Fannie Mae and Freddie Mac. They are trying to tighten up the standards to help the housing industry but they are actually messing up the works. They sure will not go to bat for a homeowner who desperately needs a loan but if you can prove you don’t need it they will give you one. Don’t get me started here!
Hard money loans are based largely on equity but you do need to be able to prove you can make the payment. The most you will get is 70% of the value of the property. If it’s worth $300,000 you will be able to get $210,000. If you want a 100% loan, hard money will not work.
Here’s a real example of a hard money loan: The borrower had almost all of the money to purchase a house. She needed only $75,000.00 more – but didn’t qualify for a bank loan. The purchase price was $231,000 and she only wanted to borrower 32% of the value. This loan got done within 4 days for a quick close and she beat out other’s who put in offers for the house because she could quickly close. Her house payment is now the payment on $75,000.
Another example is a Contractor wanted to buy a dump house. No bank would lend on it because it was so dilapidated. The Contractor had enough money for a decent down payment and proved he had enough money to fix it up and resell. He got a hard money loan, was able to fix up the house and sell it within 4 months.
Now you tell me, is that a good loan?