The Importance Of High Risk Loans For Troubled Properties

Hard money lenders give loans to borrowers on properties that have different standards than more typical real estate loans. Private lenders give more importance to the value of the collateral property rather than the borrower's credit rating. Most of these lenders do not even consider the credit rating of the borrower.

To protect themselves from default of borrowers, hard money lenders have lien rights on the collateral properties for which they are granting loans. This, plus the fact that the loan is usually 30 - 40 percent lower than the quick selling market price, gives the hard money lender a better chance of recouping his money from the loan should the borrower default; but only if the market value remains the same or goes up. A lot of money could still be lost by the lender if the market value declines though.

The loans that hard money lenders grant generally have a higher rate of interest. This is because of the higher risk associated with hard money loans. A number of factors including a poor credit rating and/or bankruptcy may plague a borrower looking for this type of loan. So conventional lenders don't usually like engaging in this type of high risk lending. The lenders who are willing to take on the extra risk in exchange for the reward of a higher rate of interest on the loan are almost always local lenders.

Hard money lending has been in existence for many years though it seems like a new idea. Somewhere in the middle of the 20th century, the feelings and rules regarding credit in USA began to change drastically and quickly. At that time, it was very difficult to obtain loans for commercial or other kinds of properties. As a solution to this difficulty, a new kind of borrowing and investment came up.

Hard money lenders are of course engaging in perfectly legal and legitimate business. The type of loans they provide are just not the first choice for many borrowers, in part because of the higher interest rates. But at times a large quantity of capital is needed for a risky venture that conventional lenders won't provide. This means that the only choice for some one seeking such a loan is one provided by hard money lenders.