Are Hard Equity Loans a Good Idea?

Hard equity loans are a type of loan known as "last resort" loans. These loans are provided by private lenders to borrowers who don't qualify for a traditional loan from a commercial bank or regular lending institution because the borrower has bad credit, wants to make an unconventional purchase, has a variable income schedule, or is otherwise unable to get loan approval. 

Hard equity loans are home loans that are provided by private investors, and not by banks.

Are Hard Equity Loans a Good Idea?

A hard equity loan might be a good idea in circumstances where difficulties such as credit problems, unemployment, foreclosure and other financial difficulties prevent the borrower from satisfying the criteria for any other type of home equity loan. 

The financial downside of a hard equity loan for people under financial duress, though, is considerable.

Hard equity loans come assigned with interest rates that are much higher than the interest rate on a conventional mortgage loan and can range as high as fifteen percent. The "sub-prime" financial character of a hard equity loans make them a higher risk for the private lender. For the lender, the high interest rate is a means of offsetting the risk. 

The hard equity loan’s equity criteria are often very strict. The borrowers frequently must have at least 30-50 percent equity in the appraised value of their home after closing costs and fees. 

Before the hard equity loan is approved, the lender must be satisfied that the home under consideration for purchase is marketable. This determination (of the home's marketability) is solely at the discretion of the lender. The lender wants to feel comfortable that they will be able to sell the property and recoup the loan amount in the event the borrower defaults on the hard equity loan. 

The money from a hard equity loan can be used to make a down payment on a new home while waiting for the first home to sell. Real estate investors sometimes acquire a hard equity loan to get sufficient cash to secure the purchase of a property, and then repay the hard equity loan when proper long term financing is obtained.

In order to be sure you know enough, speak with a mortgage specialist before approaching a private investor.