Hard Equity Loans: A Homeowner's Last Resort

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Hard equity loans are provided by private investors. These loans bypass the traditional bank lenders. For certain homeowners with bad or poor credit who are unable to access traditional lines of lending, a hard equity loan may represent the last chance for help.

Rates for Hard Equity Loans
Hard equity loans are made at rates that are higher than average mortgage loans. They are as low as 8 percent but can be 15 percent. The terms for these loans can be as short as 6 months or last as long as 20 years. The lending risk is much higher for hard equity loans since the borrower is considered to be subprime. To offset the risk of lending to a subprime borrower, interest rates are much higher for hard equity loans than with conventional home mortgages made by traditional lenders.

Requirements for Hard Equity Loans
The requirements for obtaining a hard equity loan can be stringent. The loans may have an equity requirement after fees and other charges of 30 to 50 percent of the home’s value. A borrower must be able to repay the loan and the home must be marketable. The marketability of the home is one of the key reasons that the hard equity loan is made by the private investor.

Situations for Hard Equity Loans
Situations that warrant hard equity loans include the desire to obtain cash in order to make a second property purchase. This may be suitable for a real estate investor that is looking to flip a property. A hard equity loan may be used as a bridge loan between properties. A common use is using the hard equity loan to purchase a second home while the homeowner awaits the sale of the first property. When the first home is sold, proceeds from the sale are used to pay the hard equity loan off.

Bad Credit Borrowers
Homeowners with bad credit or no credit benefit from having access to a hard equity loan. Conventional loans are near impossible to acquire for any borrower that is deemed a bad credit risk. A private investor may be willing to take chance on a bad credit homeowner if they can see or realize a healthy return on their investment.

Hard equity loans are a way for a borrower with issues or difficulties securing mortgage financing to do so. Rates for these loans are certainly not competitive when compared with a similar traditional loan. Unfortunately for some borrowers, especially subprime borrowers, a hard equity loan may be their only route.