Is Hard Money Lending Legal?

Hard money lending is a type of lending in which a private lender arranges a loan backed by real estate for a borrower. This type of lending typically comes with much higher interest rates than other loans and can be risky. While it is not as closely regulated as the commercial lending industry, there are some laws that apply to this type of lending.

Function

• The purpose of a hard money loan is to provide a last resort for those who do not qualify at traditional lenders. Hard money lenders regularly work with those who need to secure financing quickly so that they can purchase or keep a piece of real estate. Hard money lenders generally work in a specific geographic area and offer loans to those with all ranges of credit scores.

Legality

• Hard money loans are completely legal and are found in nearly every area of the country. There is not a specific agency that governs this type of lending, but lenders still have to abide by basic usury laws that are set forth by each state. These laws limit the amount of interest that can be charged on a loan of any kind. These rules limit the ability of hard money lenders to operate in certain states.

Benefits

• This type of loan can be beneficial to borrowers in certain situations. For example, if you are close to foreclosure, you could potentially get a hard money loan and stay in your home. This type of lending can also be beneficial if you have been turned down at other traditional lenders. Hard money lenders regularly work with those who have low credit scores because they charge enough interest to make up for those who default on the loans.

Risks

• This type of lending also comes with its fair share of risks. The interest rates that are charged by these lenders are sometimes two or three times higher than what you could get from a traditional lender. The terms of this type of loan are also generally very short compared to a traditional real estate loan. You may only get two or three years with this type of loan. This could require you to refinance quickly or risk going into default.

Unconventional Needs

• Hard money loans can also be used as an alternative to regular loans when a borrower has unconventional needs. For example, if a borrower wanted to build a home in a very remote location, a traditional lender may not like the idea. A hard money lender would be willing to look at the deal because they can generate returns. If you have a hard time verifying your income, a hard money lender can also come in handy.