Are "Hard Money" Purchase Loans Making a Comeback?
If you haven't visited Los Angeles recently, and have been keeping an eye on articles in the media about the home-sale and mortgage markets, you might be surprised to discover that L.A. home buyers are still out and about, looking at houses and making offers.
The problem in places like Los Angeles -- where sale prices have dropped but lending is tight -- is not finding houses at affordable prices, but getting mortgage financing together quickly enough to have your offer accepted.
The Federal Housing Administration (FHA) may have just finished its busiest fiscal year ever, but getting an FHA-backed loan may not be enough. Many sellers will still prefer taking an all-cash offer to dealing with an FHA-insured buyer.
Precisely for that reason, "hard money" loans, which are usually offered by private investors in exchange for a security interest in the property, have come back into style.
Why Your New Home Loan Mortgage Can Be a Good Investment for a Rich Person
Why might a private investor think that now is a good time to make a home loan to a prospective buyer such as yourself? Many reasons have to do with borrowers' lack of alternatives with traditional channels of credit. Consider the following:
1. The mortgage qualification process is still quite difficult (though not as restrained as six months ago), requiring better credit scores and debt-to-income ratios than in recent memory.
2. In an uncertain economic environment, sellers may look more favorably on bids with more money up-front in a down payment.
3. The traditional mortgage funding process can take months -- especially since mortgage lenders may be backlogged with refinance or modification applications from struggling homeowners.
4. The poor economy has led to increased unemployment and underemployment. "Off-the-books" earnings or earnings from self-employment, which are less acceptable to traditional institutional lenders, may attract private lenders.
5. Money from other countries, especially China, is available for the purchase of US real estate.
These are all reasons why hard money lenders believe they can make money in this environment.
Mortgage Rates Won't Be Low With Hard Money Loans
If you're working with a mortgage broker whom you trust, there is nothing wrong with also exploring the hard money option, particularly if you need your mortgage financing available sooner rather than later.
However, be wary of pursuing a hard money loan without the advice of a trusted mortgage broker, and be aware that mortgage rates and terms on hard money loans are not always the best mortgage rates on the market. Hard money lenders will often demand a higher rate of return in exchange for taking on the risk that a traditional lender is unwilling to take.
Certainly, it would be prudent to compare mortgage rates before sitting down with any hard money lender.
Andrew Freiburghouse is a writer and a businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has advised thousands of clients on a variety of financial matters.
Related articles :
More help from HSH.com
Advantages of FHA mortgages in 2016FHA loans have become more affordable in 2015, thanks to a drop in the annual mortgage insurance premium that the Federal Housing Administration charges.
10 metros where a home costs about $1,000/monthHSH.com identifies 10 metro areas where you can afford the principal, interest, taxes and insurance payments on a median-priced home for only around $1,000 per month.
HSH.com on the latest move by the Federal ReserveThe Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.
Mortgage Rates Radar 09/13/2016: Despite Fed concern, mortgage rates holding steadyHSH.com releases its latest Weekly Mortgage Rates Radar showing a slight increase in popular mortgage rates during the seven-day period ending September 13, as concerns that the Federal Reserve may make a move at next week's meeting have to buffeted the financial markets of late. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).
Mortgage Rates Radar 09/06/2016: Modest jobs report leaves rates flatHSH.com releases its latest Weekly Mortgage Rates Radar showing almost no change again in popular mortgage rates during the seven-day period ending September 6, as a fair employment report for August failed to provide conclusive evidence that a move by the Federal Reserve is forthcoming. The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).