By Moolah List
By Moolah List
Hard money loans are provided by private lending companies to commercial and residential real estate investors.
The term "hard money" refers to the fact that these loans are made based on the value of the property used as collateral rather than the creditworthiness of the borrower.
Because there is less reliance on the borrower's credit, hard money loans can be executed faster than loans originated by traditional financial institutions.
However, the fact traditional financial institutions are not involved and a transaction can be executed quickly can sometimes result in the borrower being the victim of a scam.
Below we explain the four most common hard money loan scams and offer some tips to avoid them.
If the terms of a loan are so favorable they outshine all other lenders by a considerable margin, be on guard; the deal is probably a scam.
Watch out for terms that include an interest rate well below market or competitors’ rates.
Hard money loans have interest rates anywhere from 3 to 5 percentage points above the rates charged by traditional banks, (a typical HML interest rate is between 8 and 12 percent depending on state and property type).
If the rate being offered is below that range, tread very carefully as the deal may be a scam.
If the lender does not require collateral and is willing to loan an amount equal to 100% of the value of the property, this is a huge red flag and you should back away.
All legitimate hard money lenders require collateral.
The bait and switch is a tactic that lends itself well to hard money scams.
At the outset, very favorable terms are offered, aka the bait.
Hard money lenders will advertise cheap rates to capture your attention.
The lender will offer a teaser interest rate of something like 5.99%, however once you get further along in the process you will find in order to qualify for this rate the borrower must have a great credit score, large cash reserves and a 2 or 3 year commitment with a pre-payment penalty attached.
Another type of bait and switch is when the lender changes the requirements just before closing and the terms are altered in a manner harmful to the borrower.
Oftentimes borrowers of hard money loans are under tight timelines and a scammer or unsavvy lending company may take advantage of this.
One sign a scam is in the works if is a lender is asking you to wire money for upfront fees, before they will fund your loan.
Here is a list of common fees the lender may ask you for prior to providing funding:
Though these fees are legitimate and common in the hard money lending business, they are almost always rolled into the cost of the loan.
A legitimate lender will never ask you to wire money for upfront fees before they’ll fund your loan.
Unfortunately, many borrowers fall victim to this hard money scam.
While hard money loans rely less on personal financial history and more on the value of the collateral, there still exists the need on the part of the borrower to submit sensitive personal documentation to the lenders.
If this information falls into the wrong hands, there exists the possibility of identity theft.
Look out for yourself and listen to your gut instincts and you will not fall prey to the unscrupulous tactics of hard money scammers.