Hard Money Loans: Understanding Bad Credit Mortgages
Hard money loans in the prevailing market are loans at a premium rate to the borrower in exchange for a no red tape loan. The money may be used by the lendee for whatever purpose they chose so long as the equity in the property or collateral provided is sufficient to cover the loan.
The term hard money loan initially meant a loan for hard cash. Today the term has been enhanced to cover loans for non-conventional loans such as investments, private funded loans, home equity loans and equity line of credit loans. Now it is possible to refinance our primary mortgage to purchase investment properties instead of a purchase loan.
A maximum loan on property owned by the borrower is called a cash out loan. The borrower has a loan to value, which means the loan on the property, or collateral used is equal to the value of the property or collateral used to secure the loan. This type of loan has a higher interest rate than the conventional 80%-20% mortgages.
A home equity loan is one type of loan available for a hard money cash out loan. Negative ARM loans are good for investment properties if the borrower is looking for a short-term loan or is self employed with cash flow issues.
A negative ARM mortgage calls for the payment of interest only on the loan. If the interest for a period is not paid in full the balance is added to the mortgage. The end result is an increased mortgage balance and a loss of equity in the property used for collateral. As the mortgage balance increases, the interest on the mortgage loan increases even though the interest rate remains the same. If both the loan balance and the interest rate increase, the property owner may be forced to sell or the loan may be foreclosed.
A lender may require all or some of the following items before making a hard money loan.
1. A clear precise description of the property 2. Title to collateral 3. Borrower must show expertise in the field the loan will be used in 4. Lendee must accept all lender terms unconditionally
The borrower should examine all ramifications before considering these loans.
