Hard money lenders are more interested in the value of collateral property for loans than they are in the credit score of the borrower. In fact, hard money lenders really don’t pay attention to the credit score of borrowers. And the loans they offer do not usually conform to the standards of traditional lenders.
To protect themselves from default of borrowers, hard money lenders have lien rights on the collateral properties for which they are granting loans. This, plus the fact that the loan is usually 30 – 40 percent lower than the quick selling market price, gives the hard money lender a better chance of recouping his money from the loan should the borrower default; but only if the market value remains the same or goes up. If the market value drops then the lender could end up losing a large sum of money.
Hard money lenders are mostly local private lenders. Mortgage companies or conventional banks hardly engage themselves in this kind of lending. An investment of this kind is supposed to be highly risky and such loans are sought when people are in deep financial distress. People who resort to this kind of borrowing generally have bad credit rating and some may even be going through some sort of bankruptcy. This is certainly true for commercial as well as private borrowers. As a result of this, the rate of interest in this kind of lending is usually higher. The high rate of interest absorbs some risk associated with this kind of investments.
Hard money lending has been in existence for many years though it seems like a new idea. Somewhere in the middle of the 20th century, the feelings and rules regarding credit in USA began to change drastically and quickly. At that time, it was very difficult to obtain loans for commercial or other kinds of properties. As a solution to this difficulty, a new kind of borrowing and investment came up.
The services that hard money lenders provide are of course perfectly legal. They just are not the first choice for people who want to borrow against their collateral property. But some times a lot of capital is need for a business that is not offered by conventional lending institutions. In these cases the only option is the high interest loans provided by hard money lenders.
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