People often ask about \”hard money loans\” and the truth is they should be called hard money loans because it would be hard to imagine paying the rates and fees associated with them.
A hard money loan is a loan made by a non bank institution (often wealthy individuals or investor groups) to someone who has demonstrated a failure to manage their finances correctly resulting in an ultra low credit score (a middle credit score (a.k.a. FICO) of less than 500). Some lenders now even consider borrowers with credit scores less than 400!
Here are the pros and cons:
PROS:
1. A borrower with ultra low credit scores can purchase a home. This can be a good thing or a bad thing. If they are ready to make a change and pay the mortgage on time, this COULD help reestablish the credit (more in cons). If they do not make timely payments, they will lose the house AND the LARGE down payment required.
2. Tax savings for home ownership. Your interest should be tax deductible, even from a hard money lender, provided it meets all other IRS criteria. For more info read IRS Publication 936 (Home Mortgage Interest Deduction) http://www.irs.gov/pub/irs-pdf/p936.pdf
3. Can be used to pay off a Chapter 13 bankruptcy or other major debt if you are a home owner. This should be a last resort and analyzed carefully as it may make things worse. Always discuss mortgage and finance matters with a qualified professional.
4. Can be obtained to avoid foreclosure. As with #3, this needs to be analyzed with the help of an expert.
CONS:
1. LARGE Down payment. Hard Money lenders normally do not lend more than 70% of THEIR assessed value of a property. This means you will need to have a down payment (or equity) of at least 30% (some will go up to 80%).
2. HIGH RATES