Hard money loans are so called because they are very difficult to repay due to high interest rates and fees/charges that come along with these loans. These loans are generally provided by a non-bank institution such as rich individuals or investor groups. The borrowers are generally people who have very low credit score (FICO < 500). But these loans have their advantages and disadvantages.
Advantages:
1. A borrower with very low credit scores can get a chance of buying a home. If they can make the mortgage payments on time and improve the credit score, this can be a good thing. However, if they fail to pay on time, their house as well as the huge down payment will be forfeited, thus worsening their situation.
2. You get tax savings to own your own home. Any interest even that paid to a hard money lender is tax deductible, if it fulfills all the other IRS conditions.
3. Repayment of Chapter 13 bankruptcy or any important debt is possible if you own a home. Use this as the last ditch effort and think carefully as it can aggravate your situation. Talk to a certified finance professional before taking this step.
4. Though you can use it to prevent foreclosure, it is better to consult an expert.
Disadvantages:
1. Need to make a big down payment. Hard Money lenders lend less than 70% of the estimated value of the property. So you have to make a huge down payment of nearly 30% or in worst case up to 80% of the amount.
2. Steep interest rates and innumerable fees: Hard Money Lenders are more like loan sharks than the regular bank. They are not interested in helping you out of your financial mess but are looking at it as an excellent investment source. The interest rate for these loans can be around 12% and minimum of 4 points more as closing cost.
3. May not inform the credit bureaus: These lenders are not likely to inform the credit bureaus. So this type of loan is of no use to you if you want to restore your credit in the usual sense. If you choose a hard money loan to repay the mortgage, keep record of the cancelled checks to use as a proof to be submitted to subprime lenders, when you go for refinancing after 6-12 months.
4. High chances of foreclosure or repossession: Unlike banks, a hard money lender recovers money by foreclosing on properties whose payments have lapsed. As they charge huge down payments to protect their money, avoid going to a hard money lender if you are uncertain of making timely payments. Though it is impossible to predict the future, stay away from these lenders if you know for sure that you cannot repay the hard money loan.