Types of Hard Money Loans

Most hard money lenders prefer securitizing collateral to make a loan. That collateral, such as a home, reverts to the hard money lender if the borrower defaults and the home eventually goes to foreclosure. Real estate is an excellent vehicle to secure a hard money loan, providing the property in question has equity. One of the reasons for the mortgage meltdown in 2007 was the value of homes had fallen, which left many lenders holding the bag without any security.

Here are common types of hard money loans:

•Mortgage Refinancing is a Hard Money Loan  A refinance pays off one or more loans secured to the property, which results in a new loan, generally with a bigger principal balance. A homeowner can refinance without receiving any of the proceeds by either rolling the costs of the new loan into the principal balance or paying the costs of the loan out of the borrower’s pocket.

In a cash-out refinance, the buyer takes out a new loan that is larger than the amount of the old loans plus the costs to obtain the money. The money above those two items is referred to as “cash to the borrower.” It is the net proceeds of the refinance. Many cash-out refinances are subject to deficiency judgments.

•Equity Loans are Hard Money Loans  Home equity loans fund fairly quickly and are subordinate to an existing first mortgage. In other words, an equity loan falls into second or third position. Borrowers cannot obtain a home equity loan in all 50 states.

•Bridge Loans are Hard Money Loans  Bridge loans are used by sellers who want to buy a new home before selling an existing home but need the cash from the existing home. You will see bridge loans used more often in seller’s markets than in buyer’s markets.