What Are The Perils of Hard Money Lenders?
Hard money lenders are jumping on the voids left by big banks. Specifically, those who cannot pay their mortgage are being exploited the worst. Hard money lenders charge higher than standard market interest rates and need to be dealt and handled with extra vigilance.
Hard money lenders can be either businesses or individuals. They use their extra savings, 401ks or retirement funds to supplant banks. Their goal is to charge extremely high interest rates in order to make money. They usually target people who are vulnerable in the economy such as
- Individuals who are unable to document their income
- Individuals with low credit scores
- Individuals that are historically rejected by traditional lending institutions (banks)
- Individuals who are desperate to get money from a third party
- Individuals who are modeling successful investors
The middle man between these individuals and hard money lenders is the broker. Targeted individuals get introduced to hard money lenders through brokers. If the individual ends up borrowing from the lender, brokers earn a commission or charge a fee.
Hard money lenders do not care about an individual’s income status. Their focus is on existing equity. Banks can lend up to 80% of a home’s value, whereas hard money lenders usually lend up between 50-70% of the home value. This means if a borrower cannot pay their loan, they can go into foreclosure and obtain the money. Borrowers are usually in the dark and do not understand the terms of their foreclosure. Because there is no bureaucracy when it comes to hard money lending, there is no traditional calculation, deliberation and deal evaluation. Hard money lending can be approved in a matter of days thus a borrower is left with little time to deliberate terms and conditions.
Hard money lending plays a significant factor in the mortgage problems our economy is still suffering from. Because hard money borrower’s economic health is not taken into consideration, this predatory lending propogrates balloon loan payments. Balloon loan payments are structured that borrowers pay low month payments and then have to pay a bulk sum at the end of the term. Those who are vulnerable economically, might not have the ability to pay this lump sum. Then, borrowers are convinced by hard money lenders to eschew foreclosure, flip their property, receive a traditional loan or extend their own hard money loan. All of these options play into a vicious and untenable cycle.