Residential real estate prices have been steadily climbing for the better part of five years. In just the last year or two, they have shot through the roof in many locations. The higher prices are definitely making sellers happy, but they are also shutting a lot of first-time buyers out of the market. Enter hard money.
Unfortunately, you can search the internet and easily find blog posts exclaiming how easy it is to get hard money for a first house. Most of those posts are completely wrong. If you are hoping to get hard money to finance your first house, don’t hold your breath.
Hard money is a very specific type of financing that is almost always reserved for commercial enterprises. Lenders may have been able to offer hard money on residential purchases prior to the 2008 housing crash, but that’s no longer the case. Legislation has made it far too risky for lenders to do it today.
Hard Money Basics
If you are new to the whole hard money thing, your knowledge is probably limited. For example, do you know why hard money is referred to as such? It has to do with backing.
Hard money loans are backed by some sort of hard asset. In other words, borrowers pledge collateral they are willing to lose in the event they cannot make their payments. Given that most hard money loans fund commercial property acquisitions, the properties themselves act as collateral.
This is one of the big reasons that it’s nearly impossible to get hard money for a first house. Unless you have a significant down payment, the value of the property isn’t enough to satisfy lender requirements. There simply isn’t enough value in the property to protect the lender in the event of default.
Commercial Real Estate Is Different
Hard money is available on commercial real estate because commercial properties have built-in value. At Salt Lake City’s Actium Partners, commercial real estate is what they specialize in. Not too long ago, one of their clients applied for a loan to purchase a group of multi-unit apartment buildings. The property had built-in value as much as every unit produces rental income every single month.
Commercial properties are investment properties by and large. They tend to generate income for their owners. That income adds to the value of a given property, thereby making it suitable as collateral.
Other Hard Money Uses
It is fair to say that not all hard money loans go to fund real estate investments. Sometimes a company will apply for a hard money loan in order to expand its business. Funding can be used to acquire a new building, expand an existing building, obtain new equipment, etc. The business already has established hard assets they can offer as collateral.
Hard money can also be used to satisfy existing debt for which a borrower cannot obtain refinancing through the original lender. On some of the biggest hard money deals in history, funding was utilized to complete a merger or acquisition.
Not for Mortgage Lending
The bottom line here is that hard money is not suitable for mortgage lending. If you could find a hard money lender willing to finance your first house, you would be in the minority. Mortgaging residential properties just isn’t part of the hard money business model.
If you are looking to buy your first house, you might not want to go directly to a bank or credit union. If so, try a mortgage broker. Brokers have access to a portfolio of private lenders who may be more willing to write you a mortgage.