To understand where hard money loans came from, we can go back to the horse and buggy days. The most common form of money used by settlers in early America was gold coins. Native Americans, on the other hand, traded goods like pearls and furs.
When you borrowed money, you were expected to pay it back and collateral was not always part of the deal. Cash loans are usually unsecured. On the other hand, if you haven’t paid for it, you can be shot.
In order to settle the colonies, the US government gave land away in exchange for a promise by the settlers to live in the country, growing things like corn or cotton, and raising cattle. Provide shelter, chopped settlers cut down a few trees and built their own log cabins.
Today we expect to buy an existing house or we pay a builder to build a new home for us, and we rarely own a house clear and clear. For the most part, some form of financing involves buying a house in the 21st century. There are generally three parts to the purchase price:
- Serious deposit
- Total down payment from the buyer (which includes the serious deposit)
- Residual purchase price in the form of a mortgage loan
Hard Money Loans Versus Purchase Money Loans
A buying money loan is money a home buyer borrows to buy a house. The house can be almost any type of structure, from a single family home, multiple units, to a condominium, townhome, or share cooperatively to a modular or manufactured home.
Purchase money makes up part of the purchase price. The loan is secured by the property, which means that when buyers stop making payments, lenders have the right to sell the house and get their money back home.
A hard money loan to secured real estate is a loan that money won’t buy. It is money lent to a borrower that is not always used to buy a house. You can get a hard money loan without even owning a home – with no security for the loan – providing the lender feels like a good credit risk.
A credit card cash advance is a hard money loan. Or you can get a hard money loan that is guaranteed justice at home but was not part of the original purchase price. Hard money lenders usually want the borrower and security to qualify for a hard money loan.
Loan sharks are hard money lenders
People who generally borrow money from loan sharks cannot get a loan from another source. These borrowers could have bad credit, no assets, or questionable professions. Some borrowers are simply naive and fell for hard times.
If you have an asset that can be used as collateral for the loan, you can go to a pawnshop. If you have no element of value for money, a hard money lender like a loan shark trade is the lender of choice. Loan sharks earn their money by charging very high interest rates that are common against usury laws. Credit sharks could use threats of violence to encourage borrowers to repay the debt.
All loan sharks are hard money lenders, but luckily not all hard money lenders are loan sharks. It is not advisable to borrow money from a loan shark.
Types of hard money loans
Most time depositors prefer to use collateral with securitizations to make a loan. Security like a house returns to the hard money lender when the borrower and the house finally go to foreclosure.
Real estate is an excellent vehicle to secure a hard money loan that provides real estate in question equity. One of the reasons for the mortgage crisis in 2007 was the fall in the value of homes that without a certainty many lenders keep their pockets out of.
Some buyers use hard money loans as a routine financial investment property that need to be fixed. You will save your money and pay high points with a short term take out a hard money loan.
The problem with this approach is that some buyers write their purchase like all cash offers, and they show cash accounts as proof of funds. If they get a loan, however, the transaction will not be all cash.
Common types of hard money loans
- Mortgage refinancing is a hard money loan. A refinancing pays off from one or more lending secured to the property that results in a new loan, usually with a larger principal. A homeowner can refinance without paying through any of the proceeds that either roll the cost of the new loan into the principal or the cost of the loan out of the borrower’s pocket.
- With a cash out refinance, the buyer takes out a new loan that is larger than the amount of old loans plus the cost of getting the money. The money through these two elements is called “cash for the borrower”. It is the net proceeds from the refinancing. Many cash-out refinances are subject to shortage judgments.
- Equity loans are hard money loans. Home equity loan fund is relatively quick and is subordinate to an existing first mortgage. In other words, an equity loan falls into the second or third position. Borrowers cannot get a home equity loan in all 50 states.
- Bridging loans are hard money loans. Bridging loans are used by sellers who want to buy a new house before selling an existing house, but need the money from their home. You will see bridging loans used more often in seller markets than in buyer markets.