These loans are usually obtained by borrowers who cannot qualify or the property does not qualify for conventional financing; many people doing fix and flips obtain these loans.
The interest rate and costs for these loans is higher than what you can get conventionally. The reason is that there is more risk to the lender.
We often see higher down payment requirements on these loans, e.g. 25% to 30% down, this is to protect the lender in the event of default; the loans may have pre-payment penalties, too.
Given all of the bad features of these loans, why would anyone want one?
Well, you may have an opportunity to buy a fixer upper for a low price, due to its condition, that would not qualify for conventional financing; you know if you were to fix it up, you could sell it for a handsome profit.
You would include the cost of the loan, including the number of payments and any penalties, into the profit calculation. Another example is if you have an opportunity to purchase an apartment complex with a great rate of return, but you do not have the experience necessary to qualify for
a conventional loan. You can obtain a hard money loan now, get the experience, and later refinance into a conventional loan.
There is not much of a difference today between hard money and private money loans. Hard money implies the harder terms, and private money refers to loans made by private investors. The private investors who put their own money on the line for these loans typically have hard money terms, so, we see the terms being used interchangeably.
If you have an opportunity to make some money and a hard money loan would work for you, let us know and we can help you find the source.
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