Hard money lender real estate loans provide borrowers with poor credit the chance to purchase a home. These types of loans are considerably more expensive than traditional home loans financed through mortgage lenders. This type of financing is intended for interim use while borrowers rebuild or establish a credit history.
Hard money lender real estate financing is also used by investors to purchase commercial properties or realty intended for house flipping. Investors sometimes use this type of financing to buy properties that are not in marketable condition because this type of realty does not qualify for conventional financing through banks.
Hard money loans are referred to as 'bridge financing' because they bridge the gap for individuals who do not qualify for funding through a mortgage lender. Bridge loans can be used in addition to conventional loans and are often used with seller carry back financing.
Seller carry back is a lending option that helps individuals buy real estate by combining bridge loans with conventional mortgage loans. The property owner provides a portion of financing for one to two years and the balance is financed through a bank, credit union or mortgage lender.
For example, the Seller lists his property at $250,000 and offers to carry back 40-percent financing, or $100,000. The buyer obtains a conventional home mortgage loan for $150,000. The buyer has two mortgages against the property. The bank carries the first mortgage and the seller carries the second mortgage. Carry back financing is generally limited to 70-percent maximum of the property's current market value.
Interest rates applied to bridge loans are substantially higher than interest applied to conventional home loans. Private financing interest rates are regulated by state usury laws. On average, bridge loans are charged an interest rate of 11- to 21-percent. At present, Florida has the highest usury rate which is capped at 25-percent.
Seller carry back real estate contracts often include default clauses which allow sellers to increase interest rates if borrowers become delinquent with loan payments or default on the loan and enter into foreclosure. Default interest rates can soar as high as 29-percent. Buyers can determine maximum hard money loan interest rates at UsuryLaw.com.
The amount of interest charged with bridge loans can vary depending on the amount of borrowed funds, as well as the funding source. Private real estate investors generally charge a lower interest rate than investment groups. Hard money loans for residential property typically carry a higher rate of interest than commercial property loans.
Bridge loans sometimes include a prepayment clause, penalizing borrowers who pay loans off early. One primary goal is to refinance hard money loans through a conventional mortgage lender as quickly as possible. A six-month prepayment clause is tolerable, while a two year penalty clause is unacceptable. It is highly recommended to consult with a real estate lawyer before entering into hard money borrowing.
Overall, hard money lender real estate loans are not the preferred method for financing. However, bridge loans allow borrowers with less than perfect credit the opportunity to buy a home and provide funds to investors for residential and commercial investment properties.
