5 Risky Real Estate Deals

Hard money loans may seem attractive to those who've had a run of bad luck, but it will cost them dearly.

Most hard money lenders don’t place an emphasis on a borrower's credit score or employment status and will even offer loans to borrowers who've been rejected for government-backed or private mortgages. On average, these mortgages charge interest of anywhere from 10% to 14% and can require the borrower to pay up to five points, or 5% of the loan, upfront, says Leonard Baron, adjunct professor of real estate investing at San Diego State University. (One point equals 1% of the loan. Currently, the average mortgage rate on a 30-year fixed is 5.81% and typical mortgages charge from 0 to 0.5 points, says Keith Gumbinger, a vice president at HSH Associates, a mortgage data firm.)

And, in return for taking on the extra risk, many hard money lenders require the borrower to make a down payment of around 30%, says Baron. Some may even offer mortgages with zero money down, but require the borrower to put up collateral – like their car, says Babb. The problem here is that these loan contracts are often so confusing that some borrowers don't realize they are signing away their assets, she says.

Bottom line for the borrower: Not only will you pay sky-high interest, but borrowing from a hard money lender has the potential to dig you into a deep financial hole should you fall behind on payments, says Baron.

Risk for the economy: Hard money loans make up less than 1% of the mortgage market, says Baron. “But the number of people turning to them could grow if the credit crunch continues,” he says.