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Hard money loans are made by lenders willing to accept greater risks than mainstream mortgage companies and banks. In exchange for providing loans to borrowers who would otherwise be turned down, hard money lenders charge higher interest rates. If you need a loan, and have bad credit or other problems, a hard money loan might be your easiest and best option.

"Hard money" loans are made by private investors or mortgage companies who are more lenient and flexible about accepting risk, compared to mainstream lenders. These loans are often the vehicle of last resort, made to consumers who are unable to get adequate financing from conventional lenders like banks, credit unions, and traditional mortgage companies. If your credit rating or financial history disqualifies you, or if the property you want to purchase doesn't fall within the categories or guidelines followed by mainstream lenders, you might succeed by applying for a hard loan. Because of the additional risk, hard loans carry substantially higher interest rates and normally provide short term, rather than long term, financing.

Candidates for hard money loans

Here are some typical examples of situations that might require a hard money loan:

  • You want to buy a log cabin on a remote tract of wilderness land in Alaska. Most lenders are reluctant to lend money for purchase of property that's in a distant, isolated location, especially if the land is more valuable than the house. In the event of foreclosure, this kind of property could be too difficult for the mortgage company to sell. A private investor, however, might lend you the money as a hard loan.

  • A rancher needs a mortgage to buy a neighbor's prairie acreage for grazing cattle, but it's difficult to determine the land's value by conventional appraisal methods. A retired railroad worker decides to buy antique cabooses and convert them into guesthouses in a tourist destination, but the style of housing is so unusual that conventional lenders can't traditionally appraise it. Hard money loans might be the answer in either of these circumstances.

  • You have bad credit, a recent bankruptcy, or want to borrow more than you qualify for with a mainstream lender. Conventional lenders will likely turn you down because you represent a high risk for default. But hard money lenders may accept that kind of risk, especially when the underlying collateral is valuable.

  • A developer wants to borrow $3 million to buy a factory that closed down, in order to convert the space into upscale condos. He's ready to begin construction, but he's already borrowed money for another building project, essentially tapping all his currently available credit. With a hard money loan, he can get the funds immediately. Paying extra interest is worth it for him so he doesn't have to delay his new venture.

Rules of convention

Mainstream lenders turn down loans to people with poor credit or unusual, quirky properties because they must adhere to strict industry guidelines, such as those outlined by Fannie Mae. The specific rules and sets of criteria are followed in order to reassure investors who buy the loans in secondary markets. The government supports this kind of reselling of loans, because it helps ensure that there'll always be plenty of investor money available to Americans who need to buy homes with mortgage loans. Fannie Mae, for its part, bundles together mortgages and then issues "mortgage backed securities" based on the total value of the loans in each bundle. These securities-which are traded much like stocks-can then be conveniently sold to investors around the world. In order to keep this kind of market working smoothly, the investors need to be confident that the loans they represent are solid and risk-free. As a result, the government sets strict lending guidelines.

Rules of hard money

Hard money lenders make up their own rules based on the level of risk that they're comfortable with, and their own experience in the business. Because their portfolios of loans are much harder to sell to other investors, hard money lenders can't rely on making money through secondary markets in the way that Fannie Mae does. Instead, they have to generate their own profits by charging higher interest rates to the borrower.

In distressed situations, such as bankruptcy or imminent foreclosure, hard money loans may be the only way for a homeowner to avoid a catastrophe. Of course, when consumers are under duress, they may be exposed to unscrupulous, predatory lending schemes. Gangster movies depict predatory lending to people with gambling debts or financial troubles. While Hollywood portrays extreme, illegal lending practices, the vast majority of hard money lenders aren't loan sharks at all. Instead, they occupy a perfectly respectable and important niche within the mortgage lending sector.

Despite costing more and being less popular than conventional mortgages, hard money loans can be invaluable to consumers who need them. In fact, without hard loans, many consumers would be stuck in financial catastrophes with no way out, or would have to pass up lucrative business opportunities because they lack funds.

Making the right match

Finding a hard money lender may require additional research, because they're not nearly as numerous as conventional lenders. Many only lend money in their immediate geographic areas in order to personally visit properties before making dangerous loans. Check with mortgage brokers, because they often represent some hard money lenders. You can also find hard money loans through the phone book, newspaper ads, and the Internet; but always verify lender credentials beforehand, as you should before working with any kind of professional mortgage lender.

Published on May 16, 2007