Have you ever applied for a hard money loan? If yes, then you must be well aware of the entire rigorous process you have to go through and all the documents and statements you need to submit along with your application of loan, also the real-estate property with a high market value you have to assign as your collateral to guarantee the lenders that you will not default. Lenders also keep in mind your credit score based on your credit reports, your income and history of credit payments before they make any decisions to grant or reject your loan application. Hence, it is highly important to have a clear and credible history so that you do not have to face the unfortunate incident of your loan getting rejected.
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Before moving on to the purposes and other legal implications associated with a hard money loan, I will first shed light on the basic characteristics of this particular category of loan and how is it different from other conventional types of loans. This type of loan is widely lent by private companies and investors; hence, this is the main reason why the repayment duration is so short on these loans while the interest rate charged is marginally higher as compared to other typical forms of loans issued by commercial banks and other financial institutions. Another reason which testifies the face that it is mostly issued by private investors is: the amount of loan granted is a percentage ranging between 65% and 70% of the value of property which is kept as collateral with the lender and not a 100% of the property value. The reason being: in case the borrower defaults, the lender can claim the collateral property and in return get a higher amount of money than the money lent initially, thus, allowing them to keep their own profit margin even when there is default on repayment.
A very important characteristic of the assets or real estate property kept as a security in return of the loan granted is that the property must be a quick-sale property so that the lenders do not have to wait for months before the property finally gets sold at the amount enough to cover the loan amount plus the compensation for defaulting. The factor which allows the lenders of hard money to charge such a high interest rate accompanied by a short repayment period is the quick availability of money for owners of real-estate who are in dire need for a loan to meet their dues. Therefore, for lending to them on such an urgent basis a high interest is charged and security is also required. The borrowers in return can use the money to finance their small business, home construction and as their mortgage loan.
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