Run a standard search on hard money loans and you will find site after site claiming that they are intended for people who cannot get regular loans. Even AI-powered search engines report the same thing. Guess what? It is only half true. For hard money lenders, it boils down to why a borrower doesn’t qualify for traditional financing.
Not an Option of Last Resort
Hand-in-hand with the idea that hard money is designed for people who do not qualify for regular loans is the misconception that it is an option of last resort. Nothing could be further from the truth, according to the professionals at Salt Lake City’s Actium Lending.
Actium Lending reports that the majority of hard money borrowers are real estate investors hoping to add new properties to their portfolios. They don’t look at hard money as a funding source of last resort. In fact, most of them prefer hard money. The last resort option for them is going to a bank.
Real Estate Investing and Traditional Loans
It’s not unusual for real estate investors to struggle in the traditional lending market. Banks and credit unions are reluctant to get involved in their projects because investing is risky. Failing to approve a loan does not mean an investor is a deadbeat who doesn’t pay his bills. Loan rejection doesn’t mean the investor cannot afford to borrow or would struggle to repay. It only means that a bank is not interested in funding a real estate investment.
That’s actually more common than most people know. Banks are happy to fund mortgages for home buyers looking to purchase a primary residence. But they are less enthusiastic about financing investment properties. Why? Because investment properties present risk that tends to be too high for traditional appetites.
Hard money lenders are a different breed. They are not afraid of the risky nature hard money loans present. Furthermore, they mitigate their risks by offering shorter terms, higher interest rates, and lower loan-to-value (LTV) ratios.
Reasons for Not Qualifying
Beyond traditional lenders not wanting to get involved in investment transactions, what other reasons might there be for not qualifying? Think about what you already know about consumer loans. For instance, people with poor credit ratings and histories tend to find it more difficult to qualify for mortgages and car loans.
Imagine someone unable to get a mortgage thanks to a history of unpaid bills and bills sent to collection. The borrower has a terrible credit score as a result. There is no way he will ever qualify for a mortgage until he cleans up his finances. Guest what? That person probably couldn’t get a hard money loan either.
Not for Consumer Needs
First and foremost, hard money is not for consumer needs. Firms like Actium Lenders don’t write residential mortgages. They don’t make auto loans. So that disqualifies any loan application intended to meet a consumer need.
Second, a person in such circumstances is in no position to spend hundreds of thousands of dollars on an investment property. So even if he were to apply for a hard money loan, his situation would present enough red flags for any lender to turn him away.
The truth is this: failing to qualify for a traditional loan doesn’t make a person a good candidate for hard money. Furthermore, hard money lending is not a funding option of last resort. People only think that because they misunderstand the hard money principle. The good news is that a little education would go a long way toward destroying the many hard money myths that continue to persist.