Hard money lenders are a great way to fund your initial investments. Granted, they are expensive; their rates will make you cringe, their loan-to-value ratios are low, and they usually slap on a prepayment penalty. Hard money lenders charge excessive fees to high-risk borrowers, but will only lend 50% to 75% of the value of the property.

On the other hand, sub-prime lenders offer loans to similar high-risk groups, but with better terms. Hard money lenders are referred to as such because they lend primarily on the hard asset values rather than the credit of the borrower. These lenders are sometimes referred to as collateral-based lenders as well.

Hard money lenders have been instrumental in bringing a class of properties to market that prime lenders avoid. Thanks to their financing, millions of square feet of renovated problem properties have been put back into productive use and economic viability. Hard money lenders typically require 5-10 percentage points higher interest rates than private money or conventional lenders. Plus, hard money lenders will typically charge you “points” on a loan which is prepaid interest thereby making this a rather expensive funding alternative.

If you purchase a property using a hard money lender and fall behind on payments, negotiating a workout is rarely possible. Since the loan was made using the home value as collateral instead of credit, hard money lenders are not as flexible with their terms as conventional lenders are.

That means to Prevent Foreclosure on a property you purchased through a hard money lender, you would have to try getting a sub-prime loan to pay off the hard money lender, or allow a short sale to be done on the property, if the lender allows it.

Hard money lenders are not very forgiving in terms of working out hardships. You either pay, or lose the home. They will then sell the property to someone else. This is why the interest rates are so high when using a hard money lender.

Jim Hutchinson