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Hard Money: Private Foreclosure Loans
Private foreclosure loans are given out by private lenders to individuals who are in need of a foreclosure bailout loan or who might want to finance a home purchase without proper credit. If you are looking for private foreclosure loans, you might want to ask your bank or lender if they know of any “hard money” lenders. That's how they are referred to in the banking industry. The reason they are called hard money lenders is because the terms and conditions by which one obtains money from such lenders is much harder than other types of loans. Soft money, on the other hand has fewer strict conditions and more favorable terms to the borrowers.
Rates Are Higher
Hard money lenders usually charge between 12 to 20% interest, annually. This is on top of four to five origination points to close the loan, sometimes even 10 points. Since a point is 1% of the full loan amount, you are looking at some hefty upfront fees to get your hard money loan. So, why would anyone consider private foreclosure loans? There are a variety of reasons. They may not have stellar credit. They may have exhausted all other avenues of soft money. Or, they may be close to foreclosure and this is their last resort. Another reason people use private foreclosure loans is when they are investing in fixer-uppers and need capital to do the repairs. If the after market value once repairs are done is expected to be far higher, they can finance the repairs through hard money loans and thus, use none of their own capital to get the work done.
How Private Foreclosure Loans Work
Once a hard money lender agrees to do private foreclosure loans for a customer, they will have to pay the points and agree to the strict terms of the loan. This can help the borrower buy time to sell the house and recoup some equity or stave off foreclosure proceedings. They will typically only do deals for private foreclosure loans with a loan to value ratio between 65 and 75%. So, if you are upside-down on the mortgage and the value of the home can't support a loan, it won't qualify for a hard money loan either. If, however, your market value hasn't slid too much, you can use the loan to finance time to sell the house and recoup your equity. In comparison, if you go into foreclosure, you will lose all your equity, so paying significant fees to become current on the loan can pay off in the end. The lender does make a lot of money on these types of loans, but they also are free to give the money based on their conditions and risk assessment.
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