Private Lenders: Helping Bridge the Financial Gap
Prior to the housing bubble bursting, nearly anyone could get a home mortgage loan. However, post-burst the Federal Reserve is reporting that banks are no longer doling our loans hand over fist. While many potential borrowers cannot qualify for a loan due to low FICO credit scores or lack of funds required for necessary down payment options, U.S. banks have dramatically tightened their belts and loan standards.
Roughly one-third of house prices have dipped from pre-recession values. Consequently, underwriting departments have become rigid, setting stringent requirements that are no longer flexible. This ultimately results in more loans being turned down, leaving many buyers in love with a dream home they cannot afford.
However, there appears to be a new wave of lenders cropping up – the hard money lender. Typically offering less favorable rates than banks, hard money lending provides less documentation, accepts lower credit scores and is more lenient about non-conforming loans.
Additionally, there are many times when bridge financing is required for someone to close on one property and purchase another. For example, say that someone needs to sell their home but wants to purchase another home, but there is a 30 gap between closing dates. This is where interim financing, otherwise known as a swing loan or short-term financing, is beneficial. It allows the borrower to have access to the necessary funds and repay them within, on average, between six months to three years. While this form of financing is often used in the commercial loan sector, some borrowers find it necessary when facilitating flipping high-end homes.
In the commercial loan field, banks require approximately 30 to 60 days to underwrite a loan. When a company utilizes a hard money lender for bridge financing, it provides them with the opportunity to secure a contract on another real property at an excellent price. By acting quickly, the borrower can refinance later with a traditional lending institution that may offer more favorable rates. The advantage is having the cash on hand when the borrower needs it, instead of waiting to see if the property is available in six months.
Typically, borrowers that benefit from utilizing private money lenders are those that have been evaluated by traditional financial institutions as having low cash flow, poor timing and high risk. If a borrower raises any flags within these categories, often times traditional banks will forgo funding, as they deem the borrower to be a high risk. Hard money loans help bridge this gap and may prove extremely beneficial in keeping the real estate industry moving in an upward direction.