There are two definitions of a hard money mortgage. The first is any mortgage loan not used to purchase the mortgaged property. This definition is used for purposes of foreclosure in states that do not allow a deficiency judgment for the purchase of money mortgages.
The second definition is a loan that is also referred to as a subprime or substandard loan. There is no exact definition of what makes a loan subprime or substandard. The classification of loans ranges from A loans (which are the best for the borrower) to B and C loans (usually having a 2%–3% higher interest rate than the highest rate A loan) to hard money loans. The hard money loans carry a much higher rate and higher points than B and C loans. There are variations within each category, ranging from small variations for A loans to the largest variations for hard money loans.
With the expanded use of adjustable rate loans in recent years, the subprime loan has come to be defined as any loan to a borrower with a poor credit rating, or in other words, loans to borrowers who should not be getting approved for these loans. The distinction between A, B, and C loans is now blurred. Because of the collapse of the housing market in 2007 and the high foreclosure rate of subprime mortgage loans, this is now changing back to the more traditional way mortgage loans are approved.
A common type of hard money mortgage loan is the bridge or gap loan. As the names imply, it is used to connect transactions (bridge) or fill a void (gap) between transactions. The following are examples of the use of these loans.
Your home is in foreclosure. You can sell it and come out with some money, but you need time to do this. You already have a buyer and have opened escrow. You get a temporary loan to reinstate your mortgage until your sale is finalized.
You want to buy property, but have to act immediately. You can either sell other property or arrange financing to cover the purchase, but you do not have time for either. You get a hard money loan until you can either sell or arrange suitable financing.
You have a small business. You have an opportunity to buy inventory at a once-in-a-lifetime price. You know that you can make a large profit, but you need cash to take advantage of the deal. You get a hard money loan until you can sell off enough of the product to pay it off.
All of these loans involve the borrower mortgaging property - usually his or her home - for a short period of time. Most of these loans are for one year or less. They depend on equity for security, and the borrower's credit or income-to-debt ratios are of secondary importance. The loans fund quickly - some as fast as one week. The up-front cost of these loans is usually one or two points, plus miscellaneous fees. The higher cost comes when the loan is repaid. This can be as high as 10% of the balance.
The second type of hard money loan is the subprime loan, a longer-term loan at an exceptionally high interest rate with high points and fees. The loan can be used for any purpose. It is the loan borrowers obtain when their credit or income problems disqualify them from getting a B or C loan.
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Note: This article was sent to us by: Julian S. Vandross at 05012010
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