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.
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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.
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