The dissimilarities concerning typical banks and hard money lenders are very numerous. And naturally that will probably affect the way you go about choosing between a traditional mortgage or perhaps a private mortgage. The qualifications of obtaining the mortgage and exactly what sort of service you want will probably also be a consideration. It all depends on exactly what specific needs you have as a borrower.
One big difference of a hard money lender is that a customer's credit history is almost never used but banks use it as one of the main factors in granting a mortgage. A private money lender is much more concerned with the value of the collateral property involved and the borrower’s actual ability to pay the mortgage back.
Conventional banks usually operate in the “prime” lending market where borrowers have known and trusted credit and are not high risk. Hard money lenders on the other hand sometimes give loans to those who are considered “sub-prime” borrowers because they have a relatively high risk associated with lending to them.
Because of the high risk associated with some borrowers that take out hard money loans, a significantly higher interest rate will probably generally be charged. Ten to fifteen percent interest rates are not uncommon and may go up to twenty percent or higher in some cases. As well, several more points on the mortgage are sometimes charged for originating the mortgage.
Hard money lenders can be a great deal more flexible than banks are. A customer's unique situation will probably be the basis for a hard money lender making a special deal for each borrower. But they will probably be rather stringent about enforcement of the agreed terms of the mortgage and may foreclose at the drop of a hat if they suspect there is a chance of non-payment or other violation of terms for any length of time.
A default would not be good for a money lender as he has a great deal more to lose than a bank does. A bank has a large inventory of money to draw from but a hard lender is most likely putting up his own money and does not want to risk losing it.
And so charging a higher interest rate and having collateral to back up the mortgage are very important to moneylenders. Not only does the lender not want to lose any money, he wants to make money no matter exactly what happens to the mortgage. In the event that the mortgage goes into default, a profit will probably be generated by the transfer of the collateral property to the lender.
Needless to say, the hard money lender is providing a tremendously valuable service to all sorts of people in the marketplace. Even if they are demonized for charging high rates of interest or course they must be providing value or no one would use their services.
It is important to realize however, that you really should understand exactly what you are getting into before you approach a private lender in any case. This will probably help you correctly understand exactly what is meant by any terms or agreement you enter into.
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