If you are new to all of this, here’s what it is and how it works:
There really isn’t any such thing as “Hard Money”. (Well, I guess coins are technically hard money…) The original term was a “Hard Equity” loan. This mean that the lender was lending on the actual cash value of the property. That is, the amount you could sell the property for, less any loans, back taxes, etc. that are attached to the property. Example: It’s worth $150,000 - you owe the bank or finance company $62,000, and the County $3,000 in taxes - your “Equity” is $85,000 ($150K - $65K = $85K).
This is what the lender bases his loan on. Does this mean you can borrow $85,000? No. Typically a lender will lend a percentage of the value, what is called the Loan-to-Value, or LTV. Usually no more than 75%, but more often as little as %50 to 60%. The lender will also want to have the only mortgage on the property, so they will lend you the money to payoff the old loans and taxes and sometimes additional money.
In example above, based on a $150,000 property and a 60% equity loan, you would get a $90,000 loan. From this would come the payoff on the old mortgage and back taxes ($65,000), the lenders fees and closing costs (we’ll use $6,000 for this example). This would give you $19,000 cash.
Why do hard equity lenders only lend a percentage of the value? Well, for one thing - as we have seen the last two years - the property value can go down. A $150,000 property two years ago might be lucky to bring $90,000 in today’s market. The second reason for only lending a percentage of value is the costs that the lender must bear if you don’t make your payments and the lender must take and sell the property.
(Most lenders do not want your property. Think about it. They have money. If they wanted to own property, they would buy it - and make a deal for cash! They don’t want to be real estate investors and they don’t want to be landlords. They want a good and steady stream of income - payments - for their money, and they want all of their money back when you are finished using it.)
So when a lender takes a property back, you can assume that no payments have been made for a while. Then there is the expense of foreclosure (getting the deed into the investor’s name so they can sell the property), and finally the expense of selling the property. So you can see, even at a 65% LTV, if the borrower doesn’t pay - the lender can still lose money.
Remember, the lender is basing their loan on the property. Very little consideration is made of the borrower or their credit. Hard Equity lenders want a good property and a borrower who has both the willingness and the ability to pay them back.
So who is this good for? Many special situation such as:
- Self employed.
- Recent Bankruptcy (the day after!).
- Bankruptcy buyout.
- Hard to prove income.
- Low credit score.
- Property that needs repairs before a regular bank loan can be obtained.
- A quick closing with minimum paperwork.
- A loan that doesn’t show on your credit report or balance sheet.
- Buying a home with a large downpayment but no credit / bad credit.
- Buying income property.