Together, the rehabber and today's hard money lender form a kind of partnership. If all goes well, both profit by investing in the real estate market. They simply profit in different ways. The rehabber makes a profit when he or she repairs and resells the house. The lender profits by charging fees and/or interest for the funds he provides.
Years ago, it was not always that way. Seeking private financing was considered a risky endeavor, because the ultimate goal of the financier might be to foreclose on the property. It wasn't that the fees they charged were less, it was simply that they would make loans, even when it was likely that the borrower could not repay the debt.
At that time, when you filled out a form for a hard money loan, the lenders primary interest was the amount of equity in the property. If you had enough equity, they would lend you the money. Usually, we refer to them as equity-only lenders or no-doc loans. They were less concerned about your ability to repay, because they knew that they could make as much money, sometimes more, if they foreclosed on your property.
When and if you find someone offering no-doc loans, you want to be very careful about borrowing from them. There are a number of scammers out there that use the offer of a no-credit check loan or guaranteed loan approval. I have seen them charge fees as high as $1000, under the pretenses of finding funds for investment purposes. In some cases, they never come through. In other cases, they take too much time. You can usually spot these scammers by the hard money lender form or application that they use, or the lack of one.
Changes in the foreclosure laws and the lengthy processes involved have caused changes in lending practices. There are very few legitimate equity-only lenders today. Some would-be investors may be disappointed when they see that the application form for a hard money loan includes questions about employment, capital and previous investments. Most of us recognize that any legitimate lender would want the answers to those questions.
Many people do not like change, but sometimes change is for the best. Private financing is a good source for rehab funding, real estate investing and other business opportunities that conventional lenders typically avoid. It is often difficult to get a loan for investment purposes from a bank, but even when you can, there are advantages to seeking a private lender. There is less red tape. There is less hassle. Loans can be closed quickly. Pre-approval is available. 100% financing can be had, if the loan to value ratio is good.
The best companies even offer free advice about what kind of deal to look for, how to get the best deal, how to avoid paying closing costs and more. This is why we say that the investor and today's hard money lender form a kind of partnership. A good private lender might be just the partner that you need for your next project.
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