You and your spouse are looking to buy a house. You’re not so sure you’ll get a mortgage from your bank. No worries, though. A friend suggested you apply for a hard money loan. He said that hard money loans are designed for people who don’t qualify through their banks.
Actually, what your friend told you isn’t true. You may or may not be able to get a hard money loan to buy a house. It depends on who you apply with. But before you go searching, there are some things you need to know about hard money.
Hard Money Loans Aren’t Bank Loans
First and foremost, hard money doesn’t come from a bank. It comes from a hard money lender like Salt Lake City-based Actium Partners. These are private lenders who practice asset-based lending. That’s one of the things that makes them distinctly different from banks.
As for your bank, it will not offer hard money loans. Banks do not practice asset-based lending as a general rule. They certainly don’t practice it when writing mortgages for residential properties.
Hard Money Lenders Avoid Residential Transactions
Next, know that hard money lenders tend to avoid residential transactions. This is not a hard and fast rule, but it is pretty standard. The reason is simple: hard money loans are designed to be short-term financial instruments. A term of 6-36 months is typical. By contrast, most people need 20-30 years to pay off a mortgage. Unless you have a significant source of income capable of paying off your house in 2 to 3 years, do not expect a hard money lender to look at you.
Hard Money Is Mostly for Investors
The fact that hard money lenders tend to shy away from residential transactions dictates that they gravitate toward commercial transactions. In fact, hard money is mostly reserved for investors. These are individuals or companies that invest in commercial real estate offering the promise of good returns.
If you are looking to buy a house as an investment, you might be able to sway a hard money lender. If you are buying a multi-family unit with strong rental potential, your case would be even more compelling. But you are not an investor if all you’re looking to do is purchase a primary residence.
Higher Rates and Shorter Terms
If you were able to convince a hard money lender to fund your home purchase, your loan would definitely come with higher rates and a shorter term. That is the nature of hard money lending. Rates can be several points higher than conventional mortgages. As for terms, we have already discussed those. You are not going to get a hard money loan for 20 or 30 years.
Bridge Funding Is an Option
Depending on your circumstances, you may have a compelling case to obtain a bridge loan from a hard money lender. Such a loan would be a short-term instrument designed to help you close on your home and then give you time to seek out traditional financing.
Interestingly enough, banks are known to make bridge loans to help people buy one house even as they attempt to sell another. This is mentioned just illustrate that bridge loans are more common for residential real estate transactions than straight hard money.
If you are looking to buy a home but are not sure your bank will approve a mortgage, don’t panic. There are options. It’s just that hard money isn’t one of them. You are better off working with a mortgage broker who has access to private lenders willing to lend when banks will not.
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