Hard money lenders have definitely found their niche in the real estate industry. This unique form of loan is extremely common in the residential housing arena. But why are we seeing an uptick in the number of lenders taking part in the action?
Unlike traditional mortgage loans provided by banks, hard money lenders use the value of the property as collateral against the loan. These lenders aren’t as concerned with a person’s credit history. Instead, they focus on the value of the home and the borrower’s equity. Although this may seem like a risky venture, many individuals and small companies are getting into hard money lending.
To get a better idea of why these types of lenders are on the rise, it helps to know who stands to benefit from them the most. The answer is real estate investors and homebuyers who can’t qualify for a traditional mortgage loan.
Let’s take a look at the benefits of hard money loans along with the people going after them to get a better understanding of why they’re so popular right now.
Benefits of a Residential Hard Money Loan
We mentioned the fact that hard money lenders don’t place as much importance on a borrower’s credit history when considering them for a loan. This is a huge advantage over a traditional bank loan, in which a person’s credit score has a direct impact on whether or not they get approved.
However, there are a number of other advantages that make hard money loans attractive. Some of the primary benefits to borrowers include:
- The process of applying for and receiving the loan is quick and easy.
- Investors can purchase residential property without having much money to begin with.
- Borrowers have more freedom to negotiate repayment terms.
- Hard money lenders will typically consider any type of property.
- Flexible down payments.
Although there are some downsides, such as higher interest rates and lower loan-to-value ratios, they still provide exciting opportunities for people needing quick capital. Real estate investors and homebuyers have made hard money a lucrative business for lenders looking to expand their reach in the real estate market.
Investors and House Flippers
According to stats collected by ATTOM Data Solutions, 49,059 single-family homes were flipped during the first quarter of 2019. Surely all of these investors didn’t have the capital they needed to purchase, renovate, and flip their homes. Instead, they went to a hard money lender to fund their projects.
House flippers like these loans because they’re easier to qualify for than bank or FHA loans. In addition, they can acquire the funds quickly in order to make timely bids on homes they feel would be smart investments. A traditional loan simply takes too long. Furthermore, because house flippers typically renovate and sell their investments quickly, they’re able to adhere to the shorter repayment periods of hard money loans.
Long-term real estate investors also tend to work with hard money lenders to secure the capital they need to complete renovations on a piece of residential property. Often, they need to do this before refinancing in order to get a new mortgage.
Residential Home Buyers Need Fast Cash
Ray Brown was right when he said, “The best time to buy a home is always five years ago.” Residential prices are up from last year. According to the Federal Housing Finance Agency, home prices rose 5.2% from April 2018 to April 2019.
This is bad news for home buyers, especially if they can’t qualify for a loan. Many families are now having a hard time securing mortgage loans from banks with high standards when it comes to credit scores.
Many, however, are turning to hard money lenders to help them buy their first home. Because the lenders are more concerned with the value of the property attached to the loan, a buyer with poor credit history still has a chance.
Furthermore, many homeowners who are facing foreclosure are opting for hard money loans to help them refinance their mortgage. As long as they stick to their repayment terms, they can continue living in their homes.
Regardless of whether you’re looking to get into the lucrative business of house flipping, or simply need a quick loan to buy your first family home, a hard money lender can help. The opportunities they offer simply aren’t possible with transnational home lenders.