As published in Scotsman Guide's Residential Edition, July 2008.
When clients come to you looking to fund a tree house they're building as their primary residence, where do you turn?
What if they need funding for a houseboat? Or, perhaps more common, what if they want to build a foundation for their manufactured home on a large undeveloped lot?
These and other specialized property types typically need a great deal more scrutiny than a standard, single-family residence.
While traditional lenders' tightened underwriting guidelines are forcing mortgage brokers to turn away clients who don't meet the new standards, many brokers are finding another source for clients with specialized properties -- hard- money lenders.
Most brokers don't realize the opportunities they're missing every time they have to turn away clients. Even more frustrating is the fact that a lot of these turned-down clients likely would have been B-grade clients just two or three years ago.
For brokers who turn to hard money and understand which borrowers and specialized property types would benefit from it, however, the scenario could be different.
As traditional underwriting becomes more difficult, hard money continues to grow in popularity for hard-to-place loans. For brokers faced with these types of deals, it helps to identify which loans are a good fit for hard- and private-money lenders and to know what factors to consider when working with these borrowers and property types.
Defining hard money
The hard-money industry is countercyclical to primary lending trends. In 2004 and '05, for example, hard-money lending wasn't a popular option for borrowers financed by traditional lenders -- often, for sums they couldn't afford and with collateral that didn't have equity. Now that the market at large is suffering from the effects of these practices, the hard-money industry has regained some bustle.
The hard-money industry has an unfortunate and inaccurate cloud over its head. Although its borrowers likely were declined elsewhere -- most often, they don't fit into the standard industry mold -- these borrowers aren't necessarily poor. And just because hard-money lenders charge a point or 2 more than conventional lenders doesn't make them evil loan sharks. In fact, many hard-money lenders take pride in protecting their clients' equity, rather than leveraging their property to the hilt.
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