A hard money loan is normally view as a loan of “last resort”. This type of loan is first initiated when a borrower with bad or limited credit is unable to secure conventional financing and has no other alternatives but to turn to this type of lending. Another common scenario that also occurs is when the borrower needs turnaround financing in a shorter period of time than conventional financiers can provide, as with the case of foreclosures, loan restructures, bail outs or delinquencies.
Borrowers who require funding for property purchases that are non-conventional, as with land, property in extremely rural areas, land development, construction projects, and others, often find themselves in difficult situations when trying to obtain financing in the traditional manner. These individuals are often forced to look at hard money lenders. Furthermore, real estate investors are often in need of these types of loans because of the extremely short period of time before receiving funding.
The loan amount for the hard money and interest rate that is assessed in always based solely on the appraised value of the property in question. The borrower’s credit or other personal guarantees are never taken into account. The amount of the approved loan is always based upon the LTV (Loan to Value) ratio of the property in question. LTV’s in hard money loans are often significantly lower than that of conventional real estate loans. This is occasionally referred to as a “bridge loan”, a hard money loan that is necessary for short-term financing needs.
Companies or individuals who provide hard money loans are often private investors, or sometimes lenders themselves. As a result, the financial risk involved to them is often significantly higher than that of a traditional lender. To mitigate this risk, hard money lenders in Arizona charge higher interest rates for their services as well as other related fees (closing, appraisal, recording process, documentation preparation, etc…). Lenders will also offer loans amounts that are much lower LTV than conventional lenders. This LTV can be as low as 65% at times depending upon the appraised amount of the property in question. Furthermore, potential borrowers, are required to have substantial equity in the property being used as collateral. This is to ensure there is enough equity in the property should the loan default and the property go into foreclosure.
Hard money loans may seem like an unattractive solution to most with its low LTV’s, high interest rates and fees associated with them, but there are many situations where the benefit of having a quick turnaround time for funding and the elimination of credit worthiness that is required by traditional lending institutions.
As always with any financial situation you should always do your due diligence and research prior to committing to it. The same is true when searching for Arizona hard money lenders.
