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Friday, July 10, 2009

Hard Money Loans - How They Differ From Mortgage Loans

A hard money loan is a loan that is privately funded, usually by companies that specialize in real estate. They give short term real estate loans to people to people (including people who may not be able to get a traditional mortgage) with the purpose that the purchaser fix up and sell the property for a profit. There are many ways that a hard money loan may differ from what most people expect from a real estate loan, but that is the major way, a private money loan is not intended for purchasing a home to live in.

Another way private money loans and bank loans differ is in the requirements to get financing. Hard money loans are generally easier to obtain than mortgages. The credit score necessary is often lower. It is even possible for someone with bad credit to get financing for commercial or investment property.

There are a few reasons why hard money lenders are able to approve loans more easily than banks. The first is that they charge more in interest and fees. They have to in order to compensate for the high risk they are taking.

Another reason they can afford give out these high risk loans is that they generally only give them out for around 65 to 70 percent of the market value of the property. It is up to the buyer to either come up with the difference, or to buy the house for below market value. This is completely feasible in the times we find ourselves in. It is an unfortunate reality that more and more people are getting foreclosed on. By only financing part of the market value of the property, private money lenders make sure if their client does get foreclosed on they can still recover their investment. By selling the property for market value, that way after fees, the lender breaks even.

Another major difference between hard loans and traditional mortgage loans is the length of their repayment period. Most private money loans have a maximum duration of 2 years. After that, if the client wishes to remain with the property, they must refinance.

These are just a few of the main ways in which hard money loans differ from traditional real estate loans. There are also many differences among various private money lenders. If the goal is to get a loan for a commercial or investment property, and little credit and/or a traditional loan doesn't seem to be the best option, than a hard money loan should be considered. There are plenty of references to be found online, the right answer is always in the hands of the consumer.


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