For those who have heard of hard money lenders you ought to know that they’re in the business connected with property dependent loaning. And so the investor will actually actually put up the property she or he is going to acquire as security for the mortgage she or he is seeking. These types of lenders use an LTV (mortgage to value) ratio that is a lot below what a bank would provide finance for.
The standard LTV for hard money is right around sixty five to seventy percent. So if a investor wanted to purchase a property that cost one hundred thousand dollars a hard money lender would grant a mortgage for approximately sixty five thousand to seventy thousand dollars. The remaining amount of the cost of the property will actually have to funded with a down payment from the investor.
This kind of down payment requirement is actually more similar to the way conventional banking for real estate purchases used to be. Earlier this century, like in the twenties and thirties, is was pretty common for people purchasing their own house to have to put fifty percent up for a down payment on a mortgage. Back then interest rates were more in line with market forces and so it was more expensive to borrow. But this also encouraged more saving which of course is necessary to the growth of an economy.
These days hard money loaning serves more short term borrowing needs. Usually hard money lenders give loans for a couple of months to perhaps a few years. Banks generally charge a lot less for interest than perform hard money lenders. The higher rates are to compensate the lender for the increased risk he or she is taking on.
The typical investor who goes to a hard money lender may be an investor that is buying a risky property in the market. Therefore hard money lenders need to charge more interest to get paid for the higher risk of default on the payments. And that is the reason for the higher down payment requirement as well. It helps to ensure that the investor has good incentive to pay the mortgage if he is capable.
Interest rates for hard money are typically in the twelve to eighteen percent range currently. The four or five percent that banks charge is obviously a lot lower than this. But with the rising monetary inflation of the Federal Reserve in the US, you may be justified in predicting both or these rates will actually go higher in the next few years.
Real estate investors often use hard money lenders because of how fast they can originate loans for their investments. Throughout the real estate business there is often not a lot of time to transact. As a bank might take thirty days or even more to fund a mortgage, this is not a viable option. Less than a week is how fast that sometimes a hard money lender can grant the mortgage.
Once the mortgage is approved by these lenders many of them guarantee funding by a certain date. This gives borrowers a certain element of security in knowing that the money for a purchase is really going to be there when they need it.
