Hard money lending has always been thought of as an unorthodox practice that pushes the boundaries of state lending regulations and usury laws. Hard money lenders operate in a lucrative private mortgage market that does not adhere to conventional credit and lending standards advocated by federal agencies such as the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA). These enterprises are often seen as lenders of last resort.
Loans typically issued by hard money lenders tend to be short-term and high-interest legally binding instruments that are secured by real estate by means of a recorded lien on a property. They are used for many purposes, including bridge loans for real estate development. Not all hard money lenders will seek to hold first lien position on a property, but most will prefer to do so. Borrowers tend to apply for hard money loans when they have been turned away by banks or brokers due to the current strict lending environment and tight credit guidelines. Here are five pieces of advice that borrowers must follow when dealing with hard money lenders in order to ensure their property will not be unfairly encumbered:
1 – Retain Counsel
Careful borrowers often seek the advice of a real estate attorney when applying for a mortgage refinance or home equity line of credit. Hard money lending can be a complex and intricate affair most people aren’t familiar with. It’s highly recommended that borrowers consult with an attorney before approaching a hard money lender. Some real estate attorneys can even recommend trustworthy and ethical hard money lending firms.
2 – Leave Some Equity on the Property
Pushing the limits of equity on a property is always a risky endeavor, and even more so with hard money loans. Most private lenders will not consider extending a loan on a property that has less than 30 percent equity, but borrowers should be warned that they are risking losing their properties if they mortgage over 70 percent of their real estate value with a hard money loan.
3 – Prepare to Negotiate
Origination, processing and closing fees on hard money lending can be exorbitant, but they are always negotiable. Most states will place a limit on these fees. It is not a good idea to roll these items on to the hard money mortgage, and it may be illegal to do so in some states. Balloon payments are sometimes allowed for hard money lending purposes, and these can also be negotiated.
4 – Protect Against Foreclosure
In the unfortunate case of default, hard money lenders must follow the same legal foreclosure judicial process as conventional lenders. This process can put the lender at a disadvantage, particularly in states like New York and Connecticut. Some unethical lenders may resort to high-pressure tactics to push the borrower into transferring title in case of a missed payment just to avoid having to go to court.
5 – Insure the Title
Just like on a conventional mortgage transaction, it is a good idea to understand how title insurance can provide protection against unfair conveyance of property. The endorsements on a title insurance policy differ when hard money loans are involved, thus it’s always a good idea to have an attorney review how the title will appear after closing.
In the past, mortgage applicants have been sternly warned against choosing hard money lenders as an option to their home borrowing needs, but in the wake of the sub-prime mortgage meltdown in 2008, state financial regulators have enacted new laws and regulations that give borrowers increased protection against unethical hard money lenders. This makes it a viable option for those looking for a home that may need creative financing.
Mary Cratz, a real estate consultant, specializes in finding hard money lenders in atlanta for her customers.
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