Using hard money loans for a home purchase isn't the ideal situation for your finances. However, these loans are an option to consider for those who find that traditional lending methods aren't meeting their needs. Provided the risks of the loan are fully disclosed and taken into consideration by the borrower, there is no reason a hard money loan has to be a bad thing.
Hard Money Loans Explained
Hard money loans are simple to understand, but sometimes complex to explain. Basically, in a situation where a loan is difficult to obtain from a traditional lender, a hard money loan may step in and offer the required financing. Hard money lenders are typically private investors or small companies rather than large, established businesses. They may also use very high interest rates and demanding loan terms, which makes sense, considering the gamble and risk involved.
Essentially, those who offer hard money loans are taking a chance on giving out a loan that is not considered a safe investment, whether the problem is with the asset itself or with the borrower. Similar to stock investments, though, those who make hard money loans are comparing risk versus investment just like anyone else and sometimes betting on the underdog.
A problematic borrower, such as one with a poor credit history, might seek a hard money loan for any number of purposes. As for secured loans that are poor risks, an excellent example is that of hard money loans for a home purchase.
When Might You Use Hard Money Loans for a Home Purchase?
When you take out a mortgage, the bank has an interest in the value of the property just like you do. If you should happen to default on the loan and the bank forecloses on the home, they hope it's valuable enough to sell and reclaim some of the money they gave you in the purchase. Therefore, getting a home loan requires that the property have a certain amount of marketability and value to it.
So what do you do if you want to purchase a property that isn't attractive to other buyers, or to the bank? Perhaps the home is in very poor condition and you want to purchase it in order to flip it and sell it. Maybe it's in a rural area where the land is more valuable than the home, in which case the bank will classify the home itself as being basically worthless and likely will not offer a loan. Basically, any unconventional situation where the property does not have the value that banks consider worth an investment can lead to using hard money loans for a home purchase.
Hard money loans can also come into play during a home purchase that's taking place because of financial crisis. Perhaps a homeowner is going into foreclosure and cannot get any lender -even a subprime one- to help. If a hard money lender steps in and lends the person what they need to keep foreclosure at bay for a bit into the future, the person is now paid up and foreclosure doesn't go forward. At that point, the home purchasing comes in; if the person cannot continue paying the mortgage on their existing home, they just bought some time to sell it and purchase something else, perhaps also with the use of money from the loan.
Choosing a Hard Money Loan
While the terms of a hard money loan can be intimidating, the loans certainly have their place. In some situations, purchasing a home with a traditional mortgage just isn't possible and, if you're confident the loan is worth it and you're prepared to take on the requirements, there's no reason a hard money loan can't be considered an excellent financial decision.