The financial milieu is in a constant state of flux. Time was, private hard money loans were not a large part of the financial world. They were financial instruments usually reserved for those with poor credit, or used as a last resort. Indeed, many otherwise well-qualified borrowers would not have considered the use of a private hard money loan a desirable financial option. Nowadays, private hard money loans are considered a viable alternative for even the most well-qualified borrower.
Credit histories have gained new importance.
At one point, credit histories had very little sway in the private hard money loan market. If a borrower had substantial equity in properties and was breathing, someone would come through with financing. Now a poor credit history holds quite a bit of sway. Poor credit may not put a hard money loan on the skids, but it could result in an loan offer much lower than expected or needed.
Traditional financiers are experiencing a credit crunch.
Because of these recessionary times, many of those in need of a loan, even those with excellent credit and outstanding equity or assets, are discovering that the normal venues of finance, banks for instance, are drying up. The old relationships are not as forthcoming as in the past when it comes to offering investment funds. Because of this shakeup, many borrowers are looking to private hard money lending alternatives.
Private hard money loans are not cheap.
The more or less easy availability of private hard money loans is not without its cost. Many borrowers considering such a loan should be prepared to pay interest rates somewhere between nine and fourteen percent. On top of this, add points charged on a transaction extending between three and seven, sometimes more. Of course, in credit crunch times, expensive money is often better than no money at all. And a savvy borrower usually understands that taking such a loan is much less expensive than bringing a partner into a deal.
Private lender returns are greater than those of banks.
Private individuals are usually the source of these loans, but sometimes a number of individuals will be called upon for funds. Having multiple beneficiaries is how these consortiums are termed. These loans are structured in such as way that the lenders benefit from a very good rate of return on investment, all while enjoying the security of the real estate holdings used as collateral.
Banks, because of their strict lending guidelines, cannot make anywhere near the double-digit returns of the private lenders. And these loans often cover only fifty to sixty percent of the loan to the actual value of the deal. Lending at a maximum rate of sixty percent on a property leaves a very good hedge of protection afforded by the equity.
The important thing is having the money available.
So, if a borrower cannot get funds in the more traditional venues, the private hard money loan is a viable alternative. The rates from banks are considerably less, but the money just is not always there. Though a borrower may have to endure interest rates in the double digits, the sort of leverage the loaned funds allow, especially in real estate markets, is often well worth the high cost of the loan.