Hard Money Risk
Hard money loans are more expensive than traditional loans because they are not based upon traditional credit guidelines which protect investors and banks from high default rates. As hard money lenders may not require the income verification that typical lenders require, they may experience higher default rates (and, thus, charge a higher rate of interest). Individuals and companies may opt to take a hard money loan when they cannot obtain typical mortgage financing because they do not have acceptable credit or other documentation typically required by a conforming loan. However, federal law now requires that all hard money lenders verify "ability to repay" - per the Dodd-Frank Act of 2010 - on all residential property loans. In order to prove "ability to repay", licensed hard money lenders will also be asking for documentation of income. This documentation may not be as stringent as the documentation required for a conventional loan, and the hard money lender may look at the numbers differently, but more than likely, you will still have to provide a tax return and bank statement.
Term of loan: hard money loans are typically of a shorter term than conventional loans, although you can find terms of up to 10 years depending on the lender. Because of the shorter term, borrower should ensure that they have the resources necessary to pay off the loan when it becomes due.
Prepaid interest: per the Dodd-Frank Act of 2010, it is illegal for a borrower who will be occupying the residential property to pay more than two months of interest in advance. That means that the lender cannot require that you pay for a full year of payments in advance - called "prepaid interest". However, the lender can require this on a commercial property loan.
Read more about this topic: Hard Money Lender
Famous quotes containing the words hard, money and/or risk:
“Only during hard times do people come to understand how difficult it is to be master of their feelings and thoughts.”
—Anton Pavlovich Chekhov (1860–1904)
“If I were a Brazilian without land or money or the means to feed my children, I would be burning the rain forest too.”
—Sting [Gordon Matthew Sumner] (b. 1951)
“Men’s hearts are cold. They are indifferent. Not all the coal that is dug warms the world. It remains indifferent to the lives of those who risk their life and health down in the blackness of the earth; who crawl through dark, choking crevices with only a bit of lamp on their caps to light their silent way; whose backs are bent with toil, whose very bones ache, whose happiness is sleep, and whose peace is death.”
—Mother Jones (1830–1930)