Hard money loan deals can go wrong and quickly fall apart. In fact, it can happen more easily bank loans can.
Funds are not a problem for banks but they sometimes are for money lenders. While banks are lending their depositors’ funds which are readily available, money lenders are at the mercy of the private investor to fund the hard money loans to which they have committed.
A private investor could commit to a deal and then back out at the last minute for reasons that have nothing to do with your transaction and could be an entirely personal issue for the private individual investing in money loans (e.g. an illness, death in the family, change of heart, etc.).
Foreclosure is Likely to Happen Faster
Money lenders have less patience because they are working as fiduciary to a private investor who will likely be far less tolerant than a bank when it comes to delinquent payments on the money loans. Whereas it may be customary for a bank to wait 60 to 90 days to foreclose, a money lender may foreclose after 30 days.
You May Not be able to Make the Balloon Payment
You may be able to afford the loan, but you may not be in a position to pay the balloon payment at the time the lender is expecting it. Missing a balloon payment on hard money loans may enable the money lenders to begin the foreclosure process.
Watch Out for Non-monetary Covenants on Money Loans
You may be able to afford the payment, but you may be required to maintain several different ratios (e.g. debt service coverage) as a covenant to your loan. If you are in default of that ratio, even if you are making your payment, you may lose the collateral to foreclosure. If the ratios are mandatory by the lender, negotiate generous cure times, or non-foreclosure provisions if you can.
Loan Rates and Fees Can Change
Until your transaction is closed, don’t be surprised if there are a few changes. This has less to do with the hard money lender’s integrity and more to do with the fact that the lender is funding money loans through individual investors. If the deal is quoted with one private hard money investor and that investor backs out, the next investor who does hard money loans and is interested in your real estate transaction may or may not go along with the same terms.
Virtually every hard money lender will require your personal guarantee. This is standard in the business, but you should be aware that you may be risking more than the collateral secured by the loan. Review all documents with competent counsel and know what you are signing. Most private money loans do not come with the same protections that consumer owner occupant loans come with: Caveat Emptor.
If you decide that hard money loans will work for you, you can use our portal to find money lenders who may be able to assist you.