Would you lend to a borrower in foreclosure? Or someone looking to buy a large ranch whose value couldn't accurately be determined with a standard appraisal? How about refinancing someone's mortgage so the person can take out hundreds of thousands of dollars in cash?
For "hard money" lenders, it's all in a day's work. These private individuals and small local companies operate where even subprime lenders fear to tread, making loans to the desperate and needy the same way regular banks and brokers service traditional customers. They're harder to find than mainstream lenders and they don't come cheap. But they can help hard-luck borrowers make bad situations better -- and sometimes, they're a consumer's only choice.
"There are private investors who, if the interest rate is high enough and the perceived risk is low enough, they will put the money up," says Pam Strickland, owner of Mortgage Consulting Services in Santa Barbara, Calif.
Brokers and other intermediaries who arrange hard money -- or private money -- loans "go to people who have money to lend and they match them up with people who can't get money any other way," Strickland says.
Home buying the 'hard' way
If that sounds a little like how the Mob works, don't worry. Hard money lenders aren't loan sharks who break borrowers' kneecaps when they can't repay. At the same time, these lenders aren't your Granny Sue. They charge interest rates and fees that would make conventional borrowers cringe and often base lending decisions on whether there will be enough equity in their subject homes that they can foreclose and still turn a profit. But private money fills a niche in mortgage lending, helping consumers who have specialized needs or too many credit problems to get conventional financing.
"It's across the board," says Brandon Thompson, a private money broker in Denver. "You'll see anything from a $70,000 foreclosure to a half-a-million-dollar loan, where somebody just needs so much cash out and can't verify their income to make it worthwhile for a traditional lender to look at."
For instance, Strickland says one of her hard money lender friends recently did a construction loan for someone building a cabin near Yosemite National Park. Regular lenders balk at such deals because they don't like financing properties in remote locations or those that aren't of standard frame, concrete block or other traditional-type construction. Rural buyers sometimes use hard money loans, too. That's because conventional lenders get antsy about mortgages for properties that derive a substantial portion of their value from the land rather than the house.
Buyers of expensive properties and those who already own such homes and want to cash out large amounts of their equity via refinance loans also turn to private money. So do real estate investors. These buyers purchase properties on the cheap, fix them up and sell them for profit. They use private loans because the loans come with less red tape and restrictions than bank loans.
Borrowers facing foreclosure make up the last major category of hard money customers. When someone misses a mortgage payment, that person usually has some leeway to bring the loan current. But once a 30-day delinquency turns into a 120-day or 180-day one, the lender will usually start the foreclosure process. At that point, the borrower is so far behind that even subprime lenders are reluctant to come in, refinance the loan and start the clock ticking again.