America’s exceptionally hot housing market has made it difficult for home buyers to quickly finance purchases. Even as the 2021 season winds down, lenders are still taking 60 to 90 days to fund even the easiest mortgages. That is causing uninformed bloggers and self-proclaimed financial experts to recommend buyers look for hard money loans instead.
Here’s the deal: hard money loans are not the norm for the mortgage market. In fact, it is almost impossible to get hard money financing for a primary residence. House flippers and landlords are more likely to tap hard money to fund their businesses, but single buyers purchasing homes they intend to live in still have to go through banks, credit unions, and private mortgage lenders.
If you are curious, here are four reasons Salt Lake City’s Actium Partners says hard money generally isn’t available for mortgages:
1. Banking Regulations Make It Too Difficult
The U.S. mortgage market has been tightly controlled since World War II. That’s by design. Mortgages were not highly regulated leading up to the Great Depression. As a result, both mortgage lenders and homeowners were nearly wiped out when the national economy collapsed in the late 1920s and early 1930s.
These days, banking regulations make it too difficult for banks and credit unions to offer hard money mortgage deals. It is just not worth it to them. They already have their hands full trying to meet the regulatory requirements for standard mortgages. They have no interest in taking on hard money.
2. Interest Rates Won’t Support It
As private lenders, hard money lenders put up their own cash to finance short-term deals. They do not want to be locked into a loan for more than a couple of years, at most. However, in order to make enough profit on such short-term instruments, they have to charge higher interest rates. The mortgage market simply cannot support those higher rates. Borrowers are not willing to pay higher rates or be subject to such short terms. Nor should they be.
3. Mortgages Are Too Risky
Another thing hard money lenders have to be concerned about is risk. Because they are not banks or credit unions, they are not subject to the same regulations. That also means they aren’t offered the same protections, either. That makes what they do more risky.
Hard money lenders are happy to lend to real estate investors and business owners because such borrowers have significant collateral. When it comes to funding a home mortgage, the home itself is often the collateral on which the loan is based. That, coupled with the fact that buyers traditionally have 20% or less as a down payment, makes mortgage lending too risky for hard money lenders.
4. They Want a Solid Exit Strategy
Finally, hard money lenders generally want a solid exit strategy to minimize their risk. A home buyer’s only exit is taking a loan to maturity and paying it off as scheduled or selling the home and paying that way. Neither option is all that attractive to hard money lenders.
By contrast, a real estate investor might use a hard money loan to purchase a rental property. His exit plan is to secure a traditional loan after collecting a year’s worth of rent. The traditional loan will pay off the hard money loan. That’s a solid exit plan that gives the lender a definite out date. That’s what hard money lenders want.
Though there are exceptions to the rule, most hard money lenders will not look at residential mortgages. They leave mortgages to banks, credit unions, and private mortgage lenders.