I have to chuckle every time I read a post discussing hard money from the standpoint of tapping it as a residential mortgage. Such posts betray a writer’s ignorance of the hard money industry. Here is the deal: the chances of securing a hard money mortgage on a primary residence are slim to none.
This is not to say that hard money loans cannot be used to acquire houses. Houses being purchased as investment properties are always on the table. As for residential mortgages, they are not. Hard money lenders are not mortgage lenders by either definition or law. That’s why you will probably never get a hard money mortgage.
Residential Mortgages Are Highly Regulated
It goes without saying that residential mortgages are highly regulated. They were less regulated some 50 years ago, but everything changed following the 2007/2008 housing crash. New regulations implemented after the crash completely upended the residential mortgage industry.
In the 2020s, mortgage lenders have a legal responsibility to ensure anyone they lend to has the means to pay back what they borrow. That is why banks and credit unions turn up every stone and look around every corner in order to fully understand a borrower’s financial position. They cannot afford to miss anything.
In addition, mortgage lenders are licensed to offer residential mortgages. There are certain responsibilities that come with licensing. State and federal oversight ensures that lenders toe the line if they want to remain in business.
A Different Set of Regulations
Hard money lenders are not licensed financial institutions. They are registered and licensed businesses that operate under a separate set of regulations. Moreover, the regulations they are subject to are far less restrictive than banking regulations. This is a big advantage for hard money lenders.
One of the great things about hard money lending is that it is asset-based. Lenders do not have to do exhaustive research on borrower assets, income, etc. Instead, they make approval decisions based on collateral value.
While all of this is good, it does prevent hard money lenders from getting into the residential mortgage market. Not that they would want to, but the fact that they are regulated differently prevents their entry into that market.
Most Borrowers Couldn’t Manage Anyway
Even if hard money lenders could effectively write residential mortgages, there is something else that would prevent them from doing so: most borrowers could not handle a hard money mortgage.
Hard money loans are designed to be short term in nature. How short? Salt Lake City’s Actium Lending says 6-24 months is normal for most lenders. It is common for lenders to keep terms closer to 12 months when possible.
Your typical residential home buyer could never pay off a mortgage that quickly. That’s why residential mortgages typically have terms of 15, 20, or 30 years. Trying to pay off a mortgage in just 12 months would mean monumental mortgage payments that would blow a buyer’s budget out of the water.
A Different Kind of Lending
At the end of the day, hard money is a different kind of lending. It is designed to meet unique needs that cannot adequately be addressed with traditional funding. Mortgage lending is hardly unique. It’s also not worth the time or aggravation to hard money lenders.
Next time you read a post discussing hard money lending from the perspective of residential mortgages, move on to another post. The chances of getting a hard money mortgage are virtually nonexistent because hard money lenders do not deal in the residential market. Hard money lenders are private, commercial lenders by nature.