Hard Equity Loans - Last Resort for Homeowners, But Investor's Secret Weapon

Hard equity loans are home loans provided by private investors instead of banking lenders. In this situation, you likely have found it difficult to obtain a traditional conventional mortgage for whatever reason, and you are looking for other opportunities through private investors. This may be because of bad credit, unusual property types, income schedule variability, or several other reasons. In any case, hard equity loans may be your last resort for home financing.

When you need it, you need it.

Hard equity loans are at lending rates higher than the average mortgage rates and can range from 8.5 percent to as high as 15 percent. Terms likewise can vary from 6 months up to 20 years. Because private investors are lending money on your home's equity but you are in a "sub-prime" position, the lending risk is considered higher. This requires a higher lending rate to offset the risk. The term sub-prime simply refers to the fact that you cannot meet conventional loan criteria.

Hard equity loans still have fairly strict requirements. For instance, you must still have at least 30-50 percent equity in your home's appraised value after points, fees and costs are paid. Typically points required depends on the private investor, but this can be anywhere from 2 to 10 points. In addition, you must be able to show that you have the ability to repay the loan back, and the property in question must be in a marketable location. This marketability is determined solely by the private investor making the loan.

There are some situations that make hard equity loans ideal. For instance, obtaining quick cash to place on another property to avoid long term insurance costs and to secure financing may be one reason if you are a real estate investor. Also using hard equity loans as a bridge loan between properties if often a consideration. For example, your family may use a hard equity loan as a down payment on a second home while your first home is on the market for sale.

Once the first home sells, the proceeds are used to pay off the hard equity loan. If you are a real estate investor, hard equity loans can provide a means to an end to enhance your ability to acquire investments. It is a quick way, and a short term solution, for purchasing real estate investment properties using your primary home as a base equity tool. If you can keep more than 30 percent equity in your primary home, a hard equity loan can be obtained to allow you to buy a property investment or upgrade an existing investment property. Once the short term need for cash is resolved, the investor can used the profits of a property sale or the appreciation in the property's appraised value to pay off the hard equity loan. In this way, the effects of the higher interest are not felt as much, and cash funds are more readily available.

The other common situation is if you have bad credit or no credit. Obtaining a conventional loan may be very difficult, and private investors may be more likely to take a risk on you as long as there is good equity in the property and validated income. Often these loans will be used to avoid foreclosures or to complete Chapter 13 bankruptcy payments to help someone get back on their feet. Because there is a track record of negative credit reporting, these investors consider higher risks in return for potentially higher rewards where other lenders will not.

On the flip side, if you are in a position to be a private investor, hard equity loans can be a great way to earn additional income from your own money. You can utilize a mortgage broker to make arrangements for these contractual investing relationships. Some borrowers who cannot meet regular conventional financing will turn to a mortgage broker for other options. If the broker has private investors willing to make the loan work for the right rate and term, this can be a win-win for everyone. The borrower secures needed financing, the investor earns a great investment return on their money, and the mortgage broker provides a valuable service for both parties.

Regardless which side of the situation you may be on, hard equity loans are another resource for securing mortgage financing. While they do not provide the most competitive rates, hard equity loans do serve an important role for many people. If this is your situation, be sure to speak with a mortgage specialist about your options and what may be best for you.


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