Within the mortgage industry, hard money lenders are generally classed as last resort options. This may be true, but some people will actually seek them out before even attempting to go to a traditional lender. Indeed, there are some scenarios where this can be beneficial. Let’s take a look at some of these options.
Hard Money Lenders and Commercial Real Estate Development
Let’s say that you invested heavily in a development deal that you had planned to sell at a certain time. However, as always with these situations, you misjudged the time or the budget you required, leaving you in the red. In this case, you will need a type of bridge loan that allows you to continue your project before recouping your money. If you don’t, you will default on the original loan and be in real trouble. Choosing to apply for a loan through hard money lenders may just be the perfect option in this case.
Hard Money Lenders and Rehab Investors
Another scenario is a rehab investor. These are investors that do up properties that are not owner-occupied. Most banks are reluctant to provide loans for this type of investment, because there is no guarantee that the homes will be sold at profit at a later stage. Indeed, hard money lenders are likely to be your only option here.
Hard Money Lenders and Flipping Properties
Those who invest by flipping properties also often apply for hard money from a fix and flip lender. This is because they often need money quick and only for a short period of time. If you apply for a loan through a traditional lender, you will generally be tied to that for a significant period of time. Flipping properties can be done in a matter of weeks, which would not be possible with a regular mortgage.
Hard Money Lenders and Foreclosure Borrowers
Finally, you may be going through a foreclosure. Once you are so far behind on your mortgage, your lender will no longer be willing to continue working with you, even if you suggest a restructure. Sometimes, it may be possible to apply for funds through a hard money lender, thereby avoiding the foreclosure and selling the property instead.
So why do hard money lenders provide you with funds when a traditional bank won’t even touch you? There are two reasons for this. Firstly, the interest rates are much higher, which means they earn more. Secondly, they will only lend to you if you have at least between 25% and 30% of equity in your real estate property. This way, if you do default, they are able to recoup the money.
Basically, this type of loan is a mixture between a borrower who is in a difficult situation and a lender who is willing to take a few risks because the returns are likely to be higher. Sure, it may be a last resort for many, but sometimes the last resort really is the only thing left to try.
