For the interested buyers that are looking in today’s market, there are two recurring obstacles that seem to prevent many of them from obtaining necessary loans to purchase: mortgage approval and condition of property.
With the rise of small businesses and even self-employed, many individuals have incomes that are either unverifiable, or does not meet lenders’ expectations under tighter scrutiny. Many of these individuals may have the necessary down payments and credit scores, but if income streams seem to unreliable, such as contract basis, or not enough collateral mortgage approval is sometimes difficult.
For others, especially investors and buyers looking at distressed real estate properties, more than likely many of these homes will need repair or maintenance. This is usually accredited to long vacancies, or previous residents / vandals who have taken essential fixtures in the home. Items taken could be as large as heating/cooling units, cabinetry, or even copper piping and electrical wiring behind the walls.
Typically, a purchaser would either obtain a construction loan of the FHA equivalent of a 203k loan. However with construction loans harder to obtain and not all properties qualifying for a 203k loan, there are not many other options for buyers outside of actual cash to address repairs and maintenance.
Hard money lenders have slowly stepped into the picture. Many of them are investors who have cash on the side that hasn’t been invested yet, retirees or those looking to supplement their income. They will typically lend out to purchasers who cannot qualify for a loan through normal means. Hard money loans are typically considered to be interim loans that allow purchases to obtain the home and when the loan comes due, either sell the property (if purchasing distressed real estate as an investment), refinance into a conventional loan or in some cases even extend the loan period if necessary.
Although hard money lenders have to follow the same rules as traditional lenders, such as the truth-in-lending statement they usually come at a higher interest rate. However many claim that defaults are low as many are purchasing properties with enough equity in the property.
Even though hard money lenders are a very small percentage of the market, they are slowly increasing and even becoming popular in some areas. The lenders are happy as many of them report return on investments that beat The Street. Buyers also have an alternative way to make their purchases happen.
Even though some have referred to hard money loans as the sub-prime equivalent of today’s market, expect to see hard money lenders become bigger players in the industry as the market environment continues.