Hard Money Lenders - Lenders and investors often classify money as either soft or hard.
Soft money loans tend to be easier to obtain and carry flexible terms, while hard money loans are far more restrictive with stringent requirements.
Most hard money lenders are private individuals and small local companies. These lenders make loans to borrowers who, for one reason or another, wouldn't be considered for even a sub prime loan. Hard money loans are most commonly granted to individuals who:
Are looking to purchase foreclosed property in need of major repair
Are in danger of foreclosure
Want to buy in a rural area with a substantial portion of the value derived from land rather than a home
As you might expect, a hard money mortgage doesn't come cheap. Below are some typical fees and guidelines you can expect from hard money mortgage lenders:
Maximum loan of 70% to ARV (after repaired value). In other words, a hard money mortgage lender will only loan 70% of what the home will be worth after repairs are made. So, if you find a foreclosed home for $30,000 that's in need of $30,000 worth of repairs but will be worth $100,000 after repairs are made, you can borrow up to $70,000.
High interest rates. Expect to pay significantly more interest than a traditional mortgage - generally 12-20%.
Points. While points are optional with a traditional mortgage, they're required with most hard money mortgages. (One point is equivalent to 1% of the mortgage value, so a one point charge on a $100,000 mortgage would be $1,000.) Expect to pay anywhere from 2-10 points.
Application. Hard money mortgage lenders have a stringent application process. Be prepared to provide W2's, tax returns, and pay stubs, as well as investment and bank statements.
Based on your personal financial scenario, only you can decide if a hard money mortgage lender is the best option for you. As with all loans, evaluate the terms and fees carefully to prevent making a costly mistake.