To understand where the hard money loans come from, we can go back to squid time. In early America, the most popular form of silver used by settlers was gold coins. Native Americans, on the other hand, traded products such as pearls and hides.
If you borrowed money, you had to pay it back and the guarantees were not always part of the conditions. Hard money loans are usually not guaranteed. On the other hand, if you do not pay it back, you could be killed.
To set up the settlements, the United States government gave up parcels of land in exchange for a settler’s promise to live on land, cultivate materials such as corn or cotton and raise livestock. To provide shelter, the settlers cut some trees and built their own log cabins.
Today, we expect to buy an existing home or pay a builder to build a new home for us, and we rarely own a free and unobstructed home. For the most part, buying a house in the 21st century involves some type of financing. The purchase price generally includes three parts:
Hard money loans versus buying money loans
A loan to buy is money a buyer borrows to buy a house. This home can be almost any type of structure, be it a single-family home, multiple units, a condominium, a townhouse or a storage co-op, or a modular or prefabricated house.
Purchase money is a part of the purchase price. The loan is secured by the property, which means that if the buyer stops making the payments, the lender may have the right to seize the house and sell it to recover his money.
A hard money loan secured to real estate is a loan that is not about buying money. It is money lent to a borrower, which is not always used to buy a house. You can get a hard money loan without owning a home at all – without any collateral for this loan – provided the lender feels that you represent a good credit risk.
A cash advance on a credit card is a hard money loan. Or, you can get a cash loan that is secured to the home equity but was not part of the original purchase price. Hard money lenders usually want the borrower and security to be eligible for a hard money loan.
Sharks are hard money lenders
People borrowing money from usurers can not usually obtain loans from another source. These borrowers can have bad credit, do not have assets or questionable occupations. Some borrowers are simply naive and have had difficult times.
If you have an asset that can be used as collateral for the loan, you can go to a pawnbroker. If you have no valuable items to exchange for cash, a hard money lender, such as a loan shark, is the lender of choice. Usurers earn their living by charging very high interest rates, which often go against the usury laws. Usurers can use threats of violence to encourage borrowers to repay their debt.
All money lenders are hard money lenders but, fortunately, not all hard money lenders are money lenders. It is not advisable to borrow money from a usurer.
Types of hard money loans
Most hard money lenders prefer a securitization guarantee to take out a loan. This guarantee, such as a house, is returned to the hard money lender if the borrower defaults and the house ends up being seized.
Real estate is a great way to guarantee a hard money loan, provided that the property in question has equity. One of the reasons for the bankruptcy of the mortgage in 2007 is the drop in home values, leaving many lenders without collateral.
Some buyers are used to borrowing hard money to buy investment properties that need to be repaired. They will save their money and pay high points for a strong cash loan with a short repayment period.
The problem with this approach is that some buyers write their purchase offers as cash and present cash accounts as proof of funds. If they get a loan, however, the transaction is NOT entirely in cash.
Common types of hard money loans
- Mortgage refinancing is a hard money loan. Refinancing makes it possible to repay one or more secured home loans, resulting in a new loan, usually with a larger principal balance. A homeowner can refinance without receiving any of the proceeds by incorporating the costs of the new loan into the principal balance or by paying the loan costs out of the borrower’s pocket.
- During a refinancing, the buyer contracts a new loan whose amount is greater than the amount of the old loans, plus the costs of obtaining the money. The money above these two elements is called “money to the borrower”. This is the net proceeds of the refinancing. Many refinancings are subject to default judgments.
- Participatory loans are hard money loans. The net worth loans are funded fairly quickly and are subordinated to an existing first mortgage. In other words, a participating loan is in the second or third position. Borrowers can not get a net worth loan in all 50 states.
- Bridge loans are hard money loans. Bridging loans are used by sellers who want to buy a new home before selling an existing home but need the money from the existing home. You will see that bridging loans are used more often in sellers ‘markets than in buyers’ markets.