Each year in the United States, millions of homes are sold in transactions totaling hundreds of billions of dollars. The vast majority of these sales are reliant on some form of financing. The most common is the traditional home mortgage. Home mortgages allow potential home buyers to benefit by leveraging their available capital and getting them into homes that would otherwise require decades of saving to buy.
The modern home financing industry is a finely oiled machine that relies on centuries of experience to get money into the hands of customers at rates they can afford. This is accomplished through strict lending standards, which ensure that mortgages only infrequently end up in a state of default. This is a great deal for the responsible and well-employed home buyer as it keeps rates and costs low while providing large sums in long-term financing arrangements.
But there is a downside to the efficiency of the mortgage industry: Such stringent lending standards mean that many people are unable to qualify for a home loan. In the majority of cases, people who can’t qualify for a mortgage would be well-advised to find ways to improve their credit rating, increase their cash on hand and improve and diversify their sources of active income.
For some buyers who are not able to secure mortgage financing, however, there may be alternatives to a traditional home loan.
Hard money can be a viable option where mortgages aren’t
For real estate investors who look for dilapidated or otherwise defective homes that can be bought on the cheap, fixed up and then flipped, hard money loans may be the ideal form of financing. Traditional mortgage lenders often steer clear of any deals that involve homes with serious impediments to their marketability. This often means that buyers specifically looking for fixer-uppers will not be able to secure traditional financing.
For these borrowers, hard money loans can be the answer to their short-term financing needs. In contrast to mortgages, which are usually underwritten by huge corporate banks, hard money loans are usually issued by individual investors or groups of local investors. This means that hard money loans allow almost total flexibility in the way that the loan agreement is structured. Both borrower and lender have the latitude to include any term or omit any term that they would like. This means that hard money borrowers are often able to push even the most unorthodox deals through.
Hard money means fast closings
Perhaps the single greatest benefit of hard money loans, at least for investors operating in fast-moving real estate markets, is the speed with which these loans can be finalized, and cash can be put in the buyer’s hand. In hot real estate markets, such as those seen across the United States over the last eight years, buyers who rely exclusively on traditional mortgages may find themselves severely hobbled by the slow-paced approval process.
Traditional mortgages can take three months or longer to be approved. In the end, a significant number of applications will be rejected. In real estate markets where selling times are measured in weeks, if not days, sellers may be hesitant to deal with anyone who isn’t nearly certain to be approved for mortgage financing. This can put a huge number of potential buyers at a significant disadvantage.
But for those using hard money loans, their ability to close deals is as good as that of cash buyers. For borrowers who have established long-term relationships with hard money lenders, getting the purchase money wired to a sellers account can often take less than a full business day. This can give buyers using hard money loans a decisive advantage in some of the country’s hottest real estate markets.
Hard money can save huge on out-of-pocket expenses
A $100,000 purchase using a traditional mortgage may involve $30,000 or more of out-of-pocket expenses. But a hard-money-loan purchase of the same amount would typically only require about $5,000 in initial cash outlays. In fact, many savvy investors can work out zero-down deals with their hard money lenders.