Can someone explain what a "Hard Money Loan" is and is it a good idea to get one?

Asked by wendy, Simi Valley, CA Wed Aug 4, 2010

We are under contract to purchase our "dream home" but it is contingent on us selling our home. We have 3 offers on our house now and the "best" offer is at full price BUT is contingent on the buyer selling their home first. We cannot accept/sign their offer because the contract that we have with the home we are purchasing won't allow us to accept contingent offers.

The buyer is getting a divorce and she & her soon to be ex-husband own their house out-right so our broker suggested to the buyer/broker to look into getting a hard money loan. Is this something that is easy to do?

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wendy, Both Buyer And Seller, Simi Valley, CA
Fri Aug 6, 2010
The ultimate goal is to buy our dream house and sell our home for a price that is acceptable to us and the two other offers are not acceptable to us. We have countered back at our "rock bottom" and the other buyers are not moving up enough to meet us at a price that is acceptable to us.

We are still holding on to hope that the full price offer buyer will be able to get her financing situation stable. Thanks for all your responses.
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Kevin Walton, , Ventura County, CA
Thu Aug 5, 2010
Wendy, the last few hard money loans I've done were just as difficult as a conventional loan. Hard money has tightened. The additional problem that arise is that sometimes several investors are putting up the funds for the hard money loan, and at the last minute, one of them pulls out and it causes the deal to go sideways until they find another investor which cause delays, something you really don't want especially in your situation. Hard money loans are available on refi's and purchases. Bridge loans are harder to find these days. There may one to be had with a local portfolio lender (a non FHA or FNMA loan where the lender can wheel and deal). Don't put your dream purchase in jeopardy, look for a stronger offer.
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Barry Shapiro, Agent, Camarillo, CA
Thu Aug 5, 2010
I recommend you look at the OTHER offers on the property and see if you can COUNTER only the non-contingent offer(s). This is assuming your ultimate GOAL is to acquire this dream home. All sorts of things can go wrong in the down-line chain, and hard money lenders are not at all interested in any excuses, delays, or snafus in the contractual obligation of your down-line sellers/buyers. Besides, this is THEIR problem, not yours. It becomes your problem once you accept their offer -- then you go on the dance floor with them. As much as you may be emotionally driven to buy this dream home, you will be very, very upset when it comes time for your dancing partners/buyers to remove their contingencies and they cannot, so they cancel their escrow -- and you, in turn need to cancel yours, and the music stops playing. Try to align yourself with team players that are in a position to perform -- even if it means you net less on your own home. Ask yourself, how much is this new house truly worth to you?? Let the music begin!!
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wendy, Both Buyer And Seller, Simi Valley, CA
Thu Aug 5, 2010
The hard money loan that the buyer would be getting would only be for a short period of time - the time it takes for her house to sell. They paid $290k for it and it's on the market at $560k and as I said, they own it outright. Our home is $499k. She stipulated that she'd be putting @ least 50% down our home (when she got the money from the sale of her house)

Also, I've heard of a "swing/bridge" loan. Would this possibly be a better loan for her for short term?
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Don Tepper, Agent, Burke, VA
Wed Aug 4, 2010
No. It's a terrible idea.

A hard money loan, as Monir said, is collateralized through the value of the property. However, in recent years hard money lenders have also started looking at credit.

Why is a hard money loan a bad idea?

Hard money loans will go up to about 65% of the value of the property. So if a property is worth $500,000, a hard money lender might lend a maximum of $325,000. However . . .

It's very expensive money. Often around 5 points and 15% interest. Further . . .

Hard money loans are for short periods of time--generally 3-6 months. Sometimes, with a penalty or extra payment, they can go up to a year. Further . . .

Hard money loans aren't made on primary residences. They're made on investment properties. They're not used to refinance. Investors use hard money loans in order to buy all-cash, and then they replace the hard money loan with a more conventional loan.

This is one of the reasons why the highest offer isn't always the best offer. Ask your agent about countering one of the other offers (if you need to). Or just accept one of the other offers that isn't contingent on the sale of a property.

Hope that helps.
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Ever Stewart…, , Downey, CA
Wed Aug 4, 2010
A hard money loan is an easier loan to get but the person getting the loan will have to pay higher then average interest and the will have to put a property as collateral. So if the person getting the loan defaults the person who gave the hard money loan can go after the house that was used as collateral.
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Monir Mamoun, Agent, Denville, NJ
Wed Aug 4, 2010
The hard money loan is typically a non-bank loan, collateralized through equity on a home, which goes out at a higher interest rate than a normal bank loan. The hard money loan is often for distressed situations, although more people are looking into these days because home equity lines of credit are hard to get these days. The hard money loans are typically going to max out at 60-70% LTV, so if you home is for around this amount or less compared to the equity they have in their home, a hard money loan might work. Example, if your home is selling for $200,000 and they have $300,000 equity in their home (that the wife can lay claim to) then it could work. Otherwise you are looking at a lot of complication with this deal, and you should take a "hard" look at the other offers.

More info on hard money loans at the wikipedia link.
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