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Understanding Hard Money Loans

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Commentary by Roberto Pineyro and Jason Kotar

RISMEDIA, June 9, 2008-With the number of bank-owned foreclosure properties on the rise and the decline in home values throughout the country, there are certainly good deals to be found if you are looking to purchase an investment property or two or refinance a default personal mortgage loan.

The fact is not many real estate professionals and investors are familiar with hard money loans.

No matter how good of a deal you can get on a property, qualifying to purchase an investment property can be very difficult under conventional lending guidelines. Additionally, many conventional mortgage lenders have not only tightened their lending guidelines, but have simply done away with financing investment properties.

If you are planning on building a spec home, purchasing a property as an investment, or are even a real estate agent working with someone who would like to purchase a short sale or investment property, knowing what types of private financing are available and a general understanding of how private “hard money” financing works is a must.

Hard money loans are generally used to purchase non owner-occupied investment properties or refinance owner occupied foreclosure bailouts. Hard money loans are also equity-based instead of credit and asset -based, so the borrower does not have to meet the same lending criteria, income ratios, and credit worthiness that they would have to meet under conventional lending guidelines.

Hard money deals are backed by private investor capital and are reviewed and approved on a case-by-case basis. Generally, if the borrower is interested in purchasing an investment property, the only real requirement is that the property truly is a good investment for everyone involved.

So what signifies a good deal in the eyes of a hard money lender?

Here are some general guidelines hard money lenders follow:

- The total loan amount is no greater than 60% of the current, as-is value of the home. This is also referred to as the loan-to-value ratio or “LTV.”

- The borrower has a stake in the property rather it be their own cash they are investing or even other investment properties they are using as collateral to secure the loan. Most hard money lenders generally like to see that the borrower has at least 20% of their own cash invested in the project, not including closing costs.

- The lender must also hold “first position” on the property. This means that the hard money lender must hold the primary, 1st mortgage on the property. Hard money lenders will rarely lend a 2nd mortgage on a property unless there is other collateral involved.

- Another benefit to hard money loans is that often times the total interest and points for a portion of or the entire loan term are “rolled” into the loan amount and paid in advance at closing. This means that most borrowers will not have to worry about paying a monthly mortgage payment to the hard money lender for most, if not all of the loan.

- Hard money purchases can be closed in as little as 5 business days and financing is available for nearly any type of property. Many hard money lenders will finance everything from raw land, to single family rehab properties, to large commercial, hotel, and condo developments.

Roberto Pineyro is a Principal with the Global Financial Funding Corp. He can be reached at (866) 246-6539.

Jason Kotar is president of Kotar & Associates and Diversity Lending Group, Inc.

For more information, call (954) 734-3504, e-mail JKotar@DiversityLG.com, or visit www.DiversityMortgageNews.com.

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