If you're interested in purchasing a foreclosed property or a home that needs substantial repairs, or if you're in the process of foreclosure and are trying to refinance your home, chances are that a traditional mortgage broker or mortgage lender won't be willing to work with you. In these cases, a residential hard money loan, also known as a "hard luck loan," may be your only alternative.
Unlike "soft" loans that are easy to finance with flexible terms, "hard" loans have a restrictive application process and stringent terms, and with good reason: these loans are financed by private individuals or small local companies.
It comes as no surprise that this type of loan carries a much heftier price tag than their traditional counterparts. Typical fees and restrictions associated with a residential hard money loan include:
High APR. While traditional borrowers can receive fixed rate mortgages in the 5% APR range, hard money borrowers pay significantly higher rates, typically between 12-20%.
Points requirement. With a traditional mortgage, points are an optional method used to "buy down" the interest rate. In terms of money, one point is equal to 1% of the money financed. With a hard money residential loan, points are a requirement. Expect to pay 2-10 points a or 2-10% of the amount financed a in order to receive your loan.
70% ARV (after repaired value) maximum. Hard money residential lenders will loan a maximum of 70% of the home's after repaired value. In other words, if you purchase a home for $25,000 that needs another $25,000 of repairs but will have a fair market value of $65,000 after repairs are made, the maximum funding you'll be able to receive is $45,500.
Stringent application. In order to protect their investment, hard money lenders subject borrowers to a stringent application process. If you think you'll be applying for a hard money residential loan, be prepared to provide W2's, tax returns, pay stubs, as well as statements from investment accounts and banks.
A hard money loan is a restrictive loan that carries a significant expense. However, if you don't qualify for any other type of loan, you may find the terms and fees to be a worthwhile alternative. As with any type of loan, do your research before signing and be certain that terms meet the needs of your personal scenario.