Should Hard Money Loans Be Used For Real Estate Investing?
Many of the “real estate experts” stress the importance of using other people’s money (OPM). They say it’s best to use other people’s money to defer risk, but really it’s because they want people without money to invest in real estate. In my opinion, if you don’t think a real estate investment is good enough to use your money, you probably better not ask others to invest their money. But that’s not the point of this article, today we will talk about hard money.
Privately funded, high interest, high fee real estate loans are known as hard money. These loans are “hard” because they have very strict terms and expensive fees. Hard money loans are usually really expensive. They typically have an upfront origination fee of three to four points, plus 12-18% interest.
The primary difference between hard money lending, and other types of lending, is the subject criteria. The focus on traditional mortgage loans is the borrower. Traditional loans base their risk on the borrowers credit, debt to income ratio, and job history. With hard money loans, the main focus is on the value of the property. If the property is worth more than the amount to be borrowed, hard money lenders will likely provide the funds. If the borrower happens to default, the hard money lender doesn’t have a problem foreclosing on a property with substantial equity.
Hard money loans do have a purpose, and can be a valuable tool for people getting into real estate investing. In order for many real estate deals to happen, the invester must have the financing within a few days. They have to finance the property in a matter of days. Good hard money lenders in California can provide financing within just a few days. If the property purchased really is a good real estate investment, and the buyer has a good timely exit strategy, then even though the borrowing cost may be high, the profit made is worth the cost. The important factor is the net profit, not the costs spent.
Lets say a real estate investor borrowed $100,000 at 10% interest, flipped a property, and then sold it for $140,000 six months later. The upfront fee was $3,000, or 3 points. They may have paid the hard money lender Nine Thousand Dollars, but they would have netted more than Thirty Thousand..
Smart real estate investors who use hard money loans wisely can make large profits, but using other people’s money is not always the most profitable method for Charlottesville VA real estate investing.
125 Secured Loans as an Option for Homeowners
A recently invented financial alternative for homeowners who need a second mortgage are the 125 secured loans. Homeowners now have a new financial alternative for getting a second mortgage on their homes. This is a type of home equity loan that permits the borrower to get a loan amount that is equivalent to 125 percent of the appraised value of his property. Compare this to the home equity loan that only offers an amount that is 0.75 to 0.80 times that of the appraised price. Of course, any unpaid amount in the original loan will have to be deducted from the computed total value.
The existence of 125 secured loans is quite astonishing because a substantial part of the loan is not covered by a collateral. What this means is that the extra 25 percent is risky for the lender. To try to make up for the additional risk, the lender will ask for a higher interest for the loan value. The borrower would be wise to consult some experts on the matter before proceeding with the loan because there are also other disadvantages that will be seen later.
The lender will often examine the credit score of the homeowner to find out if he is qualified for the 125 secured loan. It is usually the case that a minimum credit score will be required by the lender to try to increase the chances that the borrower will be able to pay the loan. The length of stay of the borrower in that particular house will also be an important factor for the lender. The length of stay in that home should be at least three months for the owner to be considered eligible.
If the owner has been living there for more than a year, the lender will look into the tax assessments to determine the appraised value. For that case where the length of stay is more or less one year, it would be the purchase price that would be the basis for the appraised value. Sometimes an Automated Value Model or AVM is provided by a computer that bases its calculations on the prices of similar houses within that particular neighborhood where the home in question is located.
What are the other downsides of 125 secured loans aside from more interest charges? The homeowner should realize that he might find it difficult to sell the house because he would have to pay the 25 percent extra amount to the buyer. Also, the owner cannot deduct the interest charges for the 25 percent extra loan amount from his income as a basis for computing taxes. For more real estate funding alternatives check out http://hardmoneylendersonline.com.
Significance of the Obama Foreclosure Prevention Plan
The Obama foreclosure prevention plan includes the offer of incentives to banks and other lending institutions to consent to more loan modifications, push up the number of approved refinancing applications, and make available more home loans to first-time home buyers. The Helping Families Save Their Homes Act that was approved by President Barack Obama in May 2009 is the main foundation of the program. This law was created to add to the anti-foreclosure strategies of the Hope for Homeowners Act that was previously issued to help homeowners with remaining loan balances that were bigger than the current market value of their homes.
The Obama foreclosure prevention plan assists homeowners in convincing the banks and other lenders to consent to their proposals for a refinancing of their loans so that their monthly payments will become more affordable. The initiative of the President also offers bonuses to banks and lenders if they agree to a loan modification that will decrease the monthly installments to a value that will not exceed 31 percent of the borrower’s monthly income. Fannie Mae and Freddie Mac will also be able to offer a greater number of home loans for first-time home buyers because the Obama foreclosure prevention plan has added to the funding of these two corporations.
Unfortunately, the critics of the Obama plan quickly grabbed the chance to pick apart the initiative when it failed to make a noticeable effect on the housing crisis in September 2009. However, those who like the Obama foreclosure prevention plan answered back by pointing out that it had started to have some positive results. To illustration, the program appears to have reversed the direction of the downtrend in the market values of properties and the increase in foreclosure filings in some states. In response, critics of the President’s program countered that only a small number of the borrowers who should have been qualified to get their loans modified had benefited from the program. Some opponents also pointed out that the Obama foreclosure prevention plan should have been based on acceptable economic principles. Nevertheless, members of the federal government remain upbeat about the program and have pointed out that it has reached a milestone in the number of loan modifications that have been approved by the banks. The members of the Obama Administration are positive that the President’s anti-foreclosure plan will succeed in the long run and continue to report to the public regarding its successes. Check out http://hardmoneylendersonline.com to view other methods of loan funding availeble