Asset-based lending, also known as hard money lending, rose to prominence after the Great Recession. With lending standards tightened everywhere, hard money lending became one path for getting money to borrowers who needed it.
There are pros and cons with this type of lending. For some residential mortgage originators, it makes sense to go this route, especially for clients who need to have their loans funded quickly. This will, however, likely cost the borrower more in interest and fees.
Mortgage professionals should make it a practice of being familiar with this type of lending and understand how it compares with other types of financing such as nonqualified (non-QM) mortgages. Originators who do so can provide value and offer the best advice for their clients.
Defining terms
A true hard money loan is an asset-based mortgage on a residential investment property or a commercial property with zero documentation required such as credit checks, bank statements or tax returns. True hard money is offered at a higher interest rate with higher fees.
Hard money lenders specialize in providing financing for clients who may not fit in the conventional box that banks are seeking. Hard money lenders thrive on the opportunity to fund these investments, and these loans are generally for businesses and investors. It’s riskier for hard money lenders to offer consumer loans, although some of the smaller companies do that. Middle-market and nationwide companies generally shy away from asset-based consumer loans.
Why would anyone want to take out a loan that will inevitably have higher fees and a higher interest rate compared to a traditional bank loan? The concept is built around the needs of individuals who may have a difficult time receiving loans from traditional banks.
There could be many reasons for this, such as bad credit, a failed business investment or even something as simple as someone who needs the loan quickly and can’t go through what’s considered a normal waiting period. Traditional banks often take weeks to approve loans with underwriting requirements that their investors demand.
Therefore, hard money lending is often a popular option for people who are looking for a loan to be funded quickly and efficiently. With the ability to fund loans within a shorter period of time, at terms favorable for the business or individual, true hard money may be the best, if not the only, option.
Comparing financing
What is the difference between true hard money and other forms of nontraditional mortgages, and what makes it special? There are many varieties of this type of loan, such as soft money and non-QM mortgages. Soft money is defined as a loan that requires a credit score and some documentation but utilizes the same quick funding process and higher rates.
Non-QM mortgages are any home loan that doesn’t comply with the Consumer Financial Protection Bureau’s existing rules on qualified mortgages, but this still involves credit and background checks. True hard money is the only one of these three options that needs no documentation and funds the loan completely on an asset-based opportunity.
The need for this type of loan is apparent. The ability to loan to a business or an individual who may not have the best look on paper is necessary, and true hard money, asset-based lending is available in that situation. As an example, a client may be able to get a non-QM mortgage with an 8.9% interest rate by submitting bank statements with an expected close of 60 days. Direct hard money may have a 10.5% rate, but the loan could close in a week.
So, the originator should consider the needs of the borrower. Is it a timing issue or is disclosure more of a concern? What type of interest rate is needed by the borrower? The originator should examine the situation to best suit the client’s needs with a proper loan program.
Market differences
The demand for true hard money lending varies in different markets. What may work in California may not work in the Upper Midwest. South Florida is a fluid, transient market, which makes it a perfect place for this type of loan opportunity.
In South Florida, buyers from around the world come to purchase vacation homes and investment properties. Homeowners move frequently as well. This creates a strong market opportunity with many people buying and selling properties.
Hard money lending fits well into this type of area. It also can be used for non-real estate purchases often made in warm climates, such as yachts and pleasure craft. To prove true value to your client, understand what these loans can do and why it makes sense to learn more about this type of financing.
