Why Hard Money Lenders Don’t Do Residential Mortgages
Dig around the internet and you can find articles suggesting that people having trouble obtaining mortgages can always go to hard money lenders. Such recommendations are based on a misunderstanding of what hard money is. The truth of the matter is that hard money lenders don’t do residential mortgages. There are good reasons for this.
Hard money for real estate is exclusively for commercial projects, according to the experts at Actium Partners in Salt Lake City, UT. Even when a hard money lender finances the purchase of a residential apartment building for example, it is still considered a commercial transaction. The buyer is acquiring the building as a business asset rather than their own residence. So they are not getting a residential mortgage.
Hard Money Is Short Term
As for why hard money lenders don’t do residential mortgages, there are many reasons. The first is the short-term nature of the hard money model. Hard money lenders are not banks or credit unions. They are private lenders that loan out investor funds. Those investors are looking for a return on investment within a couple of years, at most. Residential mortgages do not work.
Your typical residential mortgage is a 30-year note. Hard money lenders and their investors do not want to wait that long for their return. Even the shortest possible mortgage, at 7-10 years, is too long in the hard money game. Hard money lenders want to be in and out as quickly as possible. In most cases, this means 24 months or less.
Hard Money’s High Interest Rates
Something else to consider is that hard money typically comes with interest rates substantially higher than what banks offer. It is not a matter of predatory lending, as so many media outlets would have consumers believe. Rather, the higher interest rates are a direct result of hard money lending being substantially more risky. Lenders mitigate some of that extra risk with higher rates.
All of that said, a typical homeowner would not be able to support such high rates on a long-term mortgage. Hard money interest rates would put residential mortgages out of reach for most buyers. Lenders are not about to reduce their rates and expose themselves to more risk, so they just don’t do residential mortgages at all.
Residential Mortgages Are Highly Regulated
Even if a hard money lender were willing to go long term and offer a competitive interest rate, getting into residential mortgages wouldn’t be worth the trouble. What trouble? The trouble that comes with federal and state regulations. Suffice it to say that residential mortgages are highly regulated.
Regulations were not so stiff 30 years ago. In fact, residential mortgage lenders back in the McMansion days were actually encouraged by state and federal officials to write mortgages to customers who couldn’t truly afford to borrow. Many years of doing that eventually led to the 2007-2008 housing crash.
These days, residential mortgages are regulated by a much more strict set of rules. Hard money lenders would have to completely restructure their businesses to lend for residential transactions. There isn’t enough money to be made in residential mortgages to prompt them to do that.
Stick With Banks and Credit Unions
Anyone looking to get a residential mortgage should forget about hard money. It is better to stick with banks and credit unions. If that proves unsuccessful, an independent mortgage broker might have access to third party mortgage lenders willing to come in and offer a loan. But don’t bet on any of those lenders being hard money lenders. The hard money industry stays away from residential mortgages as a general rule.