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The Inside Scoop on Hard Money Lenders

(And When It Makes Sense to "Go Private")...

So you've exhausted the other options (traditional banks, credit unions and mortgage companies) and everyone's rejected your application with a big "DENIED" stamp on top - what now? Getting a hard-money mortgage might make sense. Or it might not. This article will help you decide...

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If This Sounds Like You:

Credit score is less than perfect. Scores typically range from 350-850. Scores that fall below 600 are considered high risk borrowers with the risk factor increasing as the score keeps dropping, scores in this range are cause for main stream lenders to run for the hills when they see you coming. Now the magic dividing line between good and bad seems to be about 620-640 depending on who you ask from 640 to 660 is considered average. If you're between 660 to 690 you're considered to be pretty good credit wise, and if you're above 690 then excellent is the word for you.

• Income not completely stable and or hard to prove. You may be between jobs or be self employed or out of work due to illness or injury. Hard money lenders typically don't worry much about the "paperwork" as they are lending primarily against the equity in your home.

There is just more month than money! High interest credit cards, loans and all of the other debts are killing you financially every month and either the creditors are calling or are about to! You just need to wrap up all of these debts into one monthly payment, a payment you know you can handle!

• Need short term money until you can get back on your feet again, you just need a little "breathing room" to sort things out

• You're a real estate investor who's come across a "screaming hot deal" on a property and have to jump on it right away! You have a significant down payment to create an equity position but don't have the time, desire or ability to jump through all of "documentation hoops" that a typical bank requires.

• You have a home, condo and or piece of land that has a fair amount of equity and can be pledged as security. Or have a family member or close friend who has the same and is willing to help by pledging theirs...

Then you might be in a position to realize a benefit by getting a private loan (aka. hard money loan).

But First - Here's Some Quick Facts About Hard Money Lenders...

They lend based on the equity in the property (e.g. a condo, building, piece of land) . As the hard asset is the collateral, private mortgage lenders don´t lend based on your credit.

The mortgages they grant are typically for a short period of time (6 months to a year), they provide an immediate solution for your short term problems. They don't want to be your bank, they just want to be your short term solution.

Yes, they charge higher interest rates! If you're going to deal with a hard money mortgage lender this is the way it is. These folks are not your bank, they make their money by lending money and as such need to get a return on it. Also unlike your bank they didn't say "no"

They can sometimes add the payments to the overall mortgage amount or deduct the payments up front giving you an opportunity to sort things out financially.

They can help increase your credit score! Even though they don't report your mortgage directly to the credit bureau your score can still rise. If the original purpose of the monies was to pay off debts that were/are reporting to the credit bureau, the fact that those debts are now paid off or down will only work to improve your score. Higher credit scores mean more options in the future for borrowes that just need some breathing room.

And now for the secret that will save you thousands of dollars when it comes to hard money mortgages...

Have an Exit Strategy!

You need to be clear on the way you're going to get out of the hard money mortgage when you're six months to a year is up! Seeing as this was a short term solution to a short term problem, you need to ensure that there is a long term or final solution at the end.

Let's say for example your credit score was less than stellar due to all of the debts you had reporting to the credit bureau and because your score was low the banks would not give you a mortgage so you could pay off these debts and improve your score, basically you were in a catch 22. Now however with those debts paid off, credit score goes up, which ultimately allows you to get a traditional mortgage, so an exit strategy!

Or if you were buying a house to flip because it was a screaming hot deal, your exit strategy might be fixing it up and selling. Just remember so long as it improves your overall situation for now and into the future, it was worth doing.

Bottom Line: Make sure you've thought out your exit strategy!

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.



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