The Value Of High Risk Loans For Distressed Properties
Hard money lenders are more interested in the value of collateral property for loans than they are in the credit score of the borrower. In fact, hard money lenders really don\’t pay attention to the credit score of borrowers. And the loans they offer do not usually conform to the standards of traditional lenders.
To protect themselves from default of borrowers, hard money lenders have lien rights on the collateral properties for which they are granting loans. This, plus the fact that the loan is usually 30 – 40 percent lower than the quick selling market price, gives the hard money lender a better chance of recouping his money from the loan should the borrower default; but only if the market value remains the same or goes up. If the market value drops then the lender could end up losing a large sum of money.
Mortgage companies and banks generally do not grant hard money loans. Hard money lenders are almost always local private lenders. The people who seek hard money loans usually have a bad credit score or have gone through bankruptcy. This makes these loans very risky as the people who resort to them are often in financial distress. The higher risk involved with these loans causes the interest rate to be higher. This higher rate of interest compensates for that risk.
Hard money lending has been in existence for many years though it seems like a new idea. Somewhere in the middle of the 20th century, the feelings and rules regarding credit in USA began to change drastically and quickly. At that time, it was very difficult to obtain loans for commercial or other kinds of properties. As a solution to this difficulty, a new kind of borrowing and investment came up.
Hard money lenders are of course engaging in perfectly legal and legitimate business. The type of loans they provide are just not the first choice for many borrowers, in part because of the higher interest rates. But at times a large quantity of capital is needed for a risky venture that conventional lenders won\’t provide. This means that the only choice for some one seeking such a loan is one provided by hard money lenders.
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