There are essentially two types of Mortgage Lenders. Both lenders secure their loans by real estate via a DOT...Deed of Trust and evidence their debt by a PM ...Promissory Note.
The type of lending best known is Conventional Lending. When home buyers and / or investment real estate buyers purchase a property their first choice is to obtain Conventional Lending. Lenders that fit into this category are Bank of America, Wells Fargo, Quicken and others. These loans are preferred by buyers of real estate because the interest rate charged by the lender is the lowest in the marketplace because the buyer “qualifies” for the loan, i.e. the buyer fills out a 1003 Loan Application, provides tax returns, employment information, bank statements, savings information, credit score, proof of income and has the the right DTI...debt to income. The lender feels comfortable that the borrower is creditworthy and has proved that he has the desire and ability to pay scheduled loan payments.
A hard money lender in contrast to a conventional lender is commonly known as an Equity Lender and requires minimal documentation from the borrower. An equity based lender looks for equity...the amount of value in a property above all indebtedness to secure the hard money loan placed on the property. A case in point is a property with a market property value ascertained by a certified appraisal and / or BPOs ...broker price opinion (S) of $1,000,000 may have existing indebtedness of $250,000 or 25% LTV...loan to value. Given that a hard money lender will loan in general up to 65% LTV...the hard money lender will loan $650,000 on the $1,000,000 property minus the $250,000 existing debt on the property. In this scenario the lender will loan the borrower an additional $400,000 on the property.
As mentioned heretofore the Conventional Lender charges the borrower the lowest market interest rate because the borrower proves his creditworthiness and ability to pay scheduled loan payments.. A hard money lender is approving a borrowers application and providing funding based on Equity Only.
Long ago the line of questioning for a would be hard money borrower would be “do you have equity in your property” and that is all they would ask.. Today, although equity is still the criterion whether a loan will be approved and funded additional questions are asked the borrower, i.e. credit score, appraisal and / or bpo’s. The reason the above additional questions are asked is not for purposes of deciding whether a loan will be granted. They are asked to determine what interest rate and points will be charged the borrower.
As mentioned, both lending types...Conventional and Hard Money has real estate equity securing the loan. When a loan is not paid on a timely basis and / or the principal is not paid in full as promised the lender has the right, within contract terms contained in the Deed of Trust to Foreclose on the loan and acquire ownership of the property.
Hard money lending is normally done by experienced lenders and / or real estate people who have a very strong background in real estate and mortgage lending. Loan requests are commonly short fused in that the borrower needs money yesterday and they are often under some form and level of pressure that makes them difficult to manage by the loan officer.
Hard money has been in existence for a very long time and has been the alternative for borrowers to obtain loan funds when they have been unable to source conventional funding.