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How Hard Money Loans Can Stop Foreclosure

Aug 17, 2007
Foreclosure rates are on the increase all over the country, causing alarm. The market has also seen an increase in defaults and higher loan-to-value ratios are making it more difficult than ever before for borrowers to find refinancing. However, no matter how bleak things seem, there is still an alternative to foreclosure in the form of hard-money loans. Also referred to as bridge loans, since they provide temporary financing for credit repair and property seasoning purposes, hard money loans can help to stop a foreclosure.

Homeowners who have been out of work and have now found a job may still be unable to meet the full payment demanded by the bank. But, due to improved circumstances, they will be able to make their regular monthly payments. A home foreclosure at this stage would ruin their credit rating and their current ability to make payments, seems like an unnecessary and extreme step. However, the lender may not be willing to accept anything less than the payment in full, leaving the homeowner with very few options. This is a typical situation where a hard money loan can be of help.

Depending on the amount of equity in the house and its current worth, some homeowners can qualify for a hard money loan. Such loans are generally offered by specific lenders and in spite of no special costs being involved, these lenders can close on a loan quite quickly. Hard money loans are available from groups of private investors, pooling their money to invest in real estate. These loans are used when the borrower has limited time left to close a loan. Alternatively, they can be used when the borrower does not want to give out their credit history or when they plan to keep the property only for a limited period of time or when there is already a plan to refinance in a short while after closing.

Real estate is the collateral asset in hard money loans and the lender assumes a lien on the property. The size of the loan, its rate and the term is based on the equity, the marketability of the property and the financial standing of the borrower can be used quickly by homeowners running out of time and options, to stop a foreclosure. There are myths about these loans, based on the impression that they have soaring interest rates and low loan-to-value ratios. In truth, hard money loans do carry a higher interest rate, but they are generally in the 12% range rather than the 18% range. The key issue is the valuation of the property. One of the methods for determining value is an appraisal by an objective third party with no connection whatsoever to the transaction. An accurate valuation of the market purchase price must be extensive and include relevant information about the property. Most such reports also feature a comparison with similar properties and an overview of the local real estate market, along with other relevant issues.

Homeowners who qualify for these loans may have to pay a premium to get this new loan to stop a foreclosure in progress. Hard money lenders can charge 4 to 5 points of the loan as their fee. Hard money loans are a perfectly viable solution for homeowners in foreclosure who are able to meet the requirements. Although expensive, these loans provide foreclosure victims a short term solution, giving them a chance to keep their homes. It allows them to rebuild their payment history.
About the Author
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