5 Dangers of Hard Money Loans

Hard money loans are best suited to borrowers in specialized situations, such as a person or business with imperfect credit, or a borrower who needs money quickly and can't afford the time it takes to navigate through the red tape of a conventional lending institution.  A hard money loan is secured by the borrower's equity in the current sale price of a piece of real estate and can be approved and issued in one to three days.  

Along with the advantages of hard money loans, which include obtaining money fast and easily, there are considerable dangers.

Five Dangers of Hard Money Loans

Strict loan terms. A hard money borrower needs to be very sure the loan will improve his financial situation and, even more importantly, leave him in a position to generate money for timely repayment. A hard money borrower is often between a rock and a hard place - in need of funds to save his business or property, but obtaining the necessary funds under terms so costly the loan will make the borrower lose his business or property even faster. And unlike a conventional loan, the borrower pays a penalty for early repayment, often as high as several months interest.

Higher combined monthly loan repayments for those already in danger of foreclosure. The combination of a higher interest rate and the fees charged by most hard money lenders can debilitate the borrower over time and leave him in a more precarious financial situation than before. Many people faced with a pending foreclosure will obtain a hard money loan to save their property. As a result, each month, the borrower will have to make both his mortgage payment and the hard money loan payment. Since the interest payments on a hard money loan are usually substantially higher than those on a traditional loan, the borrower's combined monthly loan payment obligation will be substantially higher than before. If the difficult financial circumstances that drove the borrower to obtain a hard money loan doesn't improve, he may fall behind on his payments and be forced to quickly forfeit his property.

Balloon payments. Hard money loans are issued for a shorter period of time than a conventional bank loan, often for just a few years. During that time the borrower will be repaying the loan each month at a high interest rate, and when the term of the loan expires he will have to repay the balance with a large "balloon" payment.  Many people find this extremely difficult to do.  Because a hard money loan is backed by the value of real estate, a default at the time of the balloon payment due date can cause you to go into foreclosure. Hard money loans are behind more foreclosures than all other loans combined.

Fast Foreclosure.  Extensions are difficult to obtain for hard money loans. If you get to the end of your loan term and are unable to produce the remaining balance, it is very likely any request for an extension of term will be denied. If you can't produce the money, a hard money loan will foreclose much faster than a commercial bank or conventional lending institution.

Untrustworthy Lenders. A reputable and straight-dealing hard money lender can be difficult to find. The business of lending hard money is lightly regulated and attracts predatory "operators" who are not legitimate lenders at all and will waste your time. Reject anyone who requests too high a fee upfront. Shop locally, because it's easier to verify their reputation. If you get any negative feedback, move on.

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