Why Hard Money Lending Is More Exciting Than The Blockchain

Blockchain payment technologies like Fintech are hot topics right now. However, today’s economy is not yet based on cryptocurrencies and other such technologies. In fact, according to many experts, the real heavy economic lifting is currently done by nonbank lending. Over the past 30 years or so, there has been tremendous evolution and expansion in this particular niche, and even more so over the past decade. In fact, half of the residential mortgage market is now supported by nonbank lenders, something that is also causing some concern.

Non-bank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate. The funding and operational structure of the non-bank mortgage sector remains a significant channel for systemic liquidity risk.

Be that as it may, this is a golden age for hard money lenders, private debt funds, and other non-traditional lending sources. In addition, they are aware of their limitations and risks and are considering methods of improvement. At the same time, they are focusing more strongly on both commercial real estate (CRE) projects and multifamily constructions. This is because there are two big problems with traditional banks: rising interest rates and increasing regulations.

The Growth of the Hard Money Lender

A quick look at financial news will rapidly reveal that all media eyes are on blockchain technology. However, while this has a significant impact, it is nowhere near the impact of the nonbanking sector on the economy. This is shown, for instance, in the volume of financial transactions performed by Fintech.

Transaction Value in the “FinTech” market amounts to US$4,256,048m in 2018. Transaction Value is expected to show an annual growth rate (CAGR 2018-2022) of 17.2% resulting in the total amount of US$8,018,084m in 2022.

They may be impressive figures but the non-banking sector has distributed around $100 billion in annual transactions. This was revealed by Pregin, a financial data firm.

The mortgage industry takes up by far the largest chunk of nonbank lending. Around 50% of residential mortgages were funded by non-traditional lenders in 2016, up from just 20% in 2007. For the VA and FHA insured mortgages, they funded around 75% in 2016. At least 80% of the volume of Ginnie Mae guaranteed mortgages were funded non-traditionally in 2017 as well.

Ginnie Mae (the Government National Mortgage Association) differs from Fannie Mae and Freddie Mac in that it operates as a government agency. It does not issue mortgage-backed securities and its guarantees are backed by the full faith and credit of the U.S. government.

Non-traditional Lenders Expand Their Reach as Small Banks Become Unable to Offer Mortgages

Clearly, non-traditional lenders are increasing their reach, providing services where traditional options are no longer available. Last year, 60% of the Ginnie Mae loan pools were serviced by non-banks, and 35% and 38% of the Freddie and Fannie Mae pools were also funded by them. It is also believed that this growth will only accelerate over the coming years due to the new capital rules put in place by federal regulators, which have affected all banking institutions.

Due to these rules, smaller banks in particular simply cannot offer mortgages anymore, as their portfolio is too large compared to their capital. That said, the risk this poses to small banks has been recognized. As a result, full implementation has so far been delayed while the rules are simplified.

Although some regulatory easing may therefore occur, banks had already started to move away from mortgages and because of the current uncertainty, they have continued to do so. The slack, inevitably, will be picked up by non-traditional lenders. After all, demand for projects will always continue to exist.

What Does Hard Money Mean?

Investors use hard money loans for several different real estate transactions. often, it’s the quickest path to securing a loan.

The main advantages of Hard Money are:

Speed and flexibility

Sometimes this can outweigh the drawbacks of hard money loans. Hard money lending can get complicated quickly, so you need to realize what you are getting into before making decisions to invest with hard money.

Hard money loans are asset-based loans.

They are primarily used in real estate transactions. A borrower receives funds and the loan is secured by real property and used as collateral. The collateral reverts to the hard money lender if the borrower defaults. It is called “hard money” because borrowers are charged a higher price in both interest rates and orientation fees.

Paying a Hard Money Loan Back

Hard money loans are also harder to pay back compared to soft money loans A hard money loan is funded by private investors as opposed to conventional lenders such as banks or credit unions. The terms of hard money loans are usually short. They are typically 6 months to 3 years. Long-term hard money loans are best to be avoided due to the high interest.

Retipster.com states, “Unlike traditional bank loan criteria, the ability to obtain hard money financing isn’t determined based on the borrower’s creditworthiness.” Instead, hard money lenders use the value of the property itself in determining whether to loan the funds. The property may be one the borrower already owns and wishes to use as collateral or it may be property the borrower is acquiring.”

Hard money lenders are licensed differently than traditional financial institutions and are typically regulated at the state level.  Banks have certain non-negotiable criteria that borrowers must meet before issuing a loan. Hard money lenders operate with less regulatory scrutiny, allowing them to look at all merits of a loan.

For instance, hard money lenders are able to look past employment length, income history, and credit scores.   Hard money loans are often funded more quickly than traditional loans; in most cases, funds are ready in a week. Bank loans take at least 30-45 days.

 Circumstances Where Hard Money Loans are a Good Option

There are circumstances where hard money loans may be a good option for financing a transaction.

Situations Where Cash is Needed: Enticing a seller with a cash offer can be advantageous. This approach is ideal for investors looking to acquire bargain deals or distressed properties.

When Financing is Needed Immediately: Investors can move quickly to secure time-sensitive deals.   Closing with efficiency allows for the opportunity to close more deals in a shorter period of time. This is an invaluable asset to an investor.

Another situation is when Your Credit Isn’t Up To Par: Banks and credit unions are generally less willing to work with investors that have less than perfect credit.  Hard money loan lenders will make loans that traditional financing institutions would typically pass on.

The situations that are ideal for hard money loans are:

House Flipping: This is also referred to as “fix and flips”. Real property is owned just long enough to increase the value. The property is altered (rehabbed) to increase the value

Land Loans: Borrowers use funds to purchase land Typically real estate is built on the land.   Construction Loans: This is a short-term loan used to finance the construction of real estate investment property.

Bridge Loans: Bridge loans are used to sellers who want to buy a new home before selling an existing home but need the cash from the existing home. It’s just important to note that Hard money loans do not suit every investor or every type of deal.

When considering hard money loan as an option, it’s imperative to be armed with enough knowledge so that a decision is made with confidence. If you want to learn more about hard money lenders, browse our website.