When a 3rd Mortgage Hard Money Loan Makes Sense - Marquee Funding Group (2024)

FAQs

What are typical terms for a hard money loan? ›

Hard money loans are a form of short-term financing, with the loan term lasting between 3 and 36 months. Most hard money lenders can lend up to 65% to 75% of the property's current value, at an interest rate of 10% to 18%.

Finding a bank that is willing to take the third lien position for a residential home is difficult, if not impossible. And even if a bank or lender decides to give you a loan for a third mortgage, the rates may be astronomical — for good reasons — so you may not be able to meet the demands.

Hard money loans are risky. This is primarily because they come with higher interest rates and shorter repayment terms, and they have limited regulations compared to typical mortgages. This means that you, as the borrower, would have very little protection or options if you needed help repaying the loan.

In short, defaulting on a hard money loan will inevitably lead to the foreclosure process that ends with either the bank taking possession of the property or putting it up for sale at auction.

Rates for hard money loans can vary, but the average interest rate is generally between 10% and 18%, which is significantly higher than a conventional loan. On top of that, other costs are often associated with these types of loans, including points and origination fees ranging from 2% to 6%.

The hard money lender determines how much they can offer to a borrower by using the loan to value (LTV) ratio. The LTV metric is calculated as the total loan amount divided by the value of the property used to back the loan.

To get a mortgage, borrowers also need to consider their regular, ongoing debts: Most lenders allow a debt-to-income ratio of up to 43%, but prefer 36% — meaning your monthly obligations should be around one-third of your gross income.

Consumer purpose third mortgage refinance.

This is primarily used for debt consolidation purposes. Examples of debt consolidation include: pay off credit cards, judgements, tax liens, medical debt, or foreclosure bailout.

A loan with a 75/15/10 split is another popular piggyback loan option. In this case, a first mortgage represents 75% of the home's value, while a home equity loan accounts for another 15%. And like the 80/10/10 split, the remaining 10% is the down payment.

Once you've narrowed down your options, you can start negotiating the terms of your hard money loan. The main terms you want to focus on are the interest rate, the points, the fees, the term, the prepayment penalty, and the draw schedule.

Do hard money loans hurt credit? ›

Hard money loans themselves don't directly affect your credit score. However, if you fail to repay the loan and the lender takes possession of the collateral property through foreclosure, this could negatively impact your credit. Always make sure you have a clear exit strategy for repaying the loan.

Risks of a hard money loan

While there are many legitimate lenders of hard money offering loans, there are also predatory ones who try to take advantage of borrowers.

Some hard money lenders charge interest-only payments, meaning you don't pay any money toward the principal loan amount monthly. Instead, you pay back the full principal amount at the end of the loan cycle. So, while your interest rate is higher, you generally pay less interest over time for a hard money loan.

Amortization. Unlike traditional mortgages, hard money loans usually involve interest-only payments during the loan term. Amortization refers to the process of repaying both the principal and interest over time. Hard money loans are often structured as "interest-only with a balloon payment" at the end of the term.

The majority of hard money loans do require a personal guarantee from the property owner (or, occasionally, from other individuals who are connected with the property or the owner and who greater personal net worth than the property owner).

It is usually taken for a short term of 12 months to 3 years. But unlike commercial loans from banks, hard money loans are based on property being used as collateral rather than the borrower's creditworthiness. Borrowers who worry about their credit score and the long approval process may take hard money loans.

Hard money loans are much shorter-term (typically one to two years). Thus, requiring a more considerable minimum investment ($100k+). On the other hand, private lending can last up to five or even ten years, depending on your situation. Investors looking for private funding typically only need $500 in liquid assets.

Unlike a traditional home mortgage, hard money lenders typically only charge interest on a monthly basis, which means you don't actually pay any money toward the principal loan amount at each monthly payment cycle.