Subprime and Hard Money Lenders

Although often used interchangeably, the terms subprime lender and hard money lender do not exactly refer to the same type of financier. Although they both specialize in making loans to people that traditional money lenders (banks, credit unions, mortgage companies, etc.) tend to shy away from, one can actually be viewed as a resource for more extreme circumstances than the other.

The subprime lender generally specializes in making mortgage loans to people with a poor or bad credit history, who have no down payment, or who have problems proving their income. Because these potential borrowers represent a higher risk to the lender, the interest rates that the lender offers will be higher than traditional market rates. The fees that a subprime lender charges to make the loan will usually also be higher.

The interest rates that are charged for a subprime mortgage can vary greatly. Depending upon the severity of the borrower’s circumstances, the rate can range from slightly above the normal market to several points above or more. This could represent hundreds of dollars more per month in additional interest payments. Add to that the less ideal terms (unreasonable prepayment penalties, for example) and higher fees involved with procuring the loan, and you can imagine an annual percentage rate (APR) far greater than a conventional mortgage.

The subprime market is a very lucrative one for lenders. With more and more consumers falling into problems with their credit, the pool of potential customers is massive and continues to grow. With higher profits to be gained, it’s no wonder that many traditional lenders have begun to offer subprime programs as well. And although most well-known lenders do business ethically, potential borrowers must still use all of the normal prudence and care when shopping for a mortgage lender and loan. Do your homework. Just because a lender says that you fall into the subprime category, comparison shop. Don’t just take the first thing that is given to you. Programs and fees can vary greatly, therefore talk to several different lenders to get the best loan that’s available for you.

Hard money lenders, usually private individuals or small companies, often go where even subprime lenders fear to tread. If a homeowner is already facing foreclosure proceedings, for example, even subprime lenders may balk at his or her circumstance. A hard money lender may be their last resort. These lenders tend to make loans based the homeowners’ equity in the property, not his or her credit history. Hard money lenders will make loans between forty percent to no more than seventy percent of the property’s appraised value, so that in the event of having to foreclose they will still be able to make a profit. High interest with strict terms, these loans are meant to be short term (often with balloon payments after a few years), to give the borrower time to get ready to qualify for more traditional financing.

Hard money lenders can be a great resource for real estate investors, however. They provide money quickly without the red tape of traditional lending institutions, a key point when capital is needed to buy a real estate, renovate it, and turn it around for a quick sale. Even with the much higher fees and rates of hard money, investors can still make substantial profits turning over properties in this manner.