Private Money: The Forgotten Solution
The make-sense factor

Although the emphasis of hard-money underwriting is on the property, another major factor in loan decisions is the sensibility of the transaction, or as some hard-money lenders call it, the "make-sense factor." Most use this as a large part of their underwriting criteria.

Private-money lenders determine the make-sense factor simply by using common sense. Here are two examples of deals and why they do or don't make sense:

Makes-no-sense example:

A borrower requests a loan to bail him or herself out of foreclosure. He is six months delinquent on his mortgage and has an incredible amount of consumer debt on which he is also delinquent. His current loan is at 50-percent LTV, but he demands the maximum LTV of 70 percent to take out $60,000 in cash from the proceeds. The borrower refuses to pay off any existing debt and insists that this $60,000 will be put to good use.

This proposed loan does not make sense. Why? The borrower shows no good faith to get back on track and repair his situation. Who's to say that he won't take the loan ($60,000 cash out) and then file bankruptcy on the lender?

Makes-sense example: Another borrower also requests a loan to bail him or herself self out of foreclosure. He is six months delinquent on his mortgage, has a small amount of credit-card debt and a few collections, and currently has a 475 FICO score. He lost his job about eight months ago but was recently hired at a new company. He is now able to make his monthly payments and just needs to catch up. His current loan is at 50-percent LTV, and he requests the maximum 70-percent LTV in order to make his mortgage current and pay off his consumer debt and a few collections. Additionally, he is taking out $5,000 to give himself a head start and plans to refinance in 12 months once his credit has been repaired by re- establishing a good mortgage history.

In this example, the proposed loan does make sense. The borrower's intent is clear and genuine, and his situation will improve from receiving this loan. He also shows good will by paying off his debt with the proceeds of this loan.

The pros and cons

Hard-money lending relies on the circumstances of each borrower's situation to provide the ability to repay the debt, with less emphasis on credit score, credit history, job stability and tax returns. In fact, most of these loans are based on a borrower's stated income and stated asset.

Hard-money lenders will lend to borrowers who are one day out of bankruptcy and will even bail someone out of foreclosure 20 days prior to the foreclosure date. The property and collateral are much more important than a bad payment history for these types of loans.

Further, closing a loan in five to 10 days is standard for hard-money lenders, whereas most banks and other traditional lenders will take 30 to 90 days, depending on the property type. For borrowers who have quirky circumstances or are under time constraints, hard money may be their solution.

It may sound like an easy sell, but it's not really. Hard-money interest rates can range from as low as 10 percent to 18 percent or more. Fees may range from 3 percent to 6 percent and more, depending on the lien position (first or second), the circumstances and the time in which the loan must be completed.

Borrowers often think long-term when they should be thinking short-term and think short-term when they should be thinking long-term. Selling a 10-percent to 13-percent interest rate and 3 percent to 6 percent in fees in a world infested with 1.25-percent option ARM rates can be difficult, to say the least. And good loan officers only sell their clients on what is best for them.

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