Every week, FCTD receives inquiries from people who are not good matches for hard money loans. It's important to remember that hard money loans are primarily used by real estate investors as short-term financing solutions to acquire vacant commercial properties, or properties needing major renovations before qualifying for long-term bank financing. This active and experienced real estate investor is the ideal borrower, and best positioned to secure hard money loans. But in this blog post, I want to discuss the opposite – the borrower who is not a good fit for a hard money loan – and suggest alternative solutions better suited to these financing needs. It can be frustrating to waste time pursuing a loan that just doesn’t exist in the hard money lending world.
Below are the borrowing scenarios I’ll cover:
Let’s get started…
If you’re a first-time homebuyer whose FHA loan application was turned down due to low credit scores or insufficient income, a hard money loan won’t be a viable financing alternative for multiple reasons, including:
Most hard money loans are intended for real estate investors using the loans for business purposes, whereas first-time homebuyers need a consumer purpose loan to purchase their primary residence. I wrote a blog post explaining the difference between business and consumer purposes and that at least 90% — if not 95% — of hard money lenders offer only business purpose loans.
You'll have the best chance of success if you live in California, which has a few excellent lenders offering owner occupied hard money loans. For other states... it’ll be hard to find a consumer purpose hard money lender. Hard money lenders simply don’t cater to consumer financing. Especially since the Great Recession, when state-level and federal regulations popped up to counter the abuses from the Subprime mortgage era, owner-occupied loans have become cumbersome to the point where the few hard money lenders that did offer them decided it wasn’t worth the compliance and regulatory risk. There are always unintended consequences of new laws; these happened to limit access to credit where there was a need.
Many first-time homebuyers use FHA loans, with a 96.50% Loan-To-Value (LTV) ratio (3.5% down payment), to get into their first home.
Owner-occupied hard money loans, on the other hand, restrict the LTV ratio to 65-70%.
I recommend working to improve credit scores or adding a non-occupant co-borrower to help qualify for the FHA loan rather than spending any time looking for a hard money loan.
As I said above, 90-95% of hard money loans are for business purposes. Debt consolidation loans to fund home improvements or pay off credit cards or income tax liens are consumer purpose loans. It will be really hard to find a hard money lender for this loan. FCTD receives several of these types of requests each week from across the country, but they are not loans our lenders invest in.
Homeowners would be better served trying for a second mortgage with a local credit union, or a small community bank with fewer than five branches. Google “state chartered banks” (as opposed to federally chartered banks) within your area. The results will list banks on the state banking regulator website. Find the nearest result and inquire with that bank.
The other option is borrowing from friends and family. We tell people all the time: “This loan falls under the friends and family category as opposed to a hard money loan scenario.”
FCTD receives at least one request for a Chapter 13 Bankruptcy buyout loan each month, usually from someone who wants to buy an investment property after only one to two years into their five-year bankruptcy repayment plan.
Is it possible to get a hard money bankruptcy buyout loan? Yes —but it’s highly unlikely.
A Chapter 13 bankruptcy is a personal bankruptcy. Thus, the hard money loan would fall under consumer purposes since the use of funds are going toward consumer debts. Very few hard money lenders (<10%) offer consumer purpose loans, so it will be hard to find a lender. If you do happen to find a lender, then they need to be willing to work with the bankruptcy trustee over a two to four month period before a new loan can close. The trustee will ultimately decide if the new hard money loan can go through to pay off the bankruptcy. Most lenders aren’t interested in spending the time required to make this happen, when there are numerous loans with little, if any, such complications.
If you’re in a Chapter 13 bankruptcy and need to get out of the repayment plan, ask your bankruptcy attorney for any contacts or referrals at credit unions, community banks, or other types of lenders. If those options don’t bear fruit, then it goes to the friends and family category since a hard money loan is very unlikely.
I get two to three calls each week from real estate investors (mostly house flippers) and primary residence home buyers seeking 100% financing. Usually, they are approved for a 65% LTV first mortgage and found FCTD on a search for hard money second mortgages, thinking we may be able to finance their down payment and closing costs as a second mortgage.
It’s impossible.
The 100% Combined Loan-To-Value (CLTV) hard money second mortgage doesn’t exist. No lender wants to do that loan, taking on all the downside risk while retaining very little upside. (I’ve written about how big the losses could be to a hard money second mortgage lender if a house flipper defaults on the first [and second] mortgage and walks away from the project. It doesn't pay to make this loan unless the lender is seeking a loss to offset a large capital gain).
The only way FCTD does 100% financing is when the borrower has another investment property owned free and clear to use as additional collateral (blanket loan or cross-collateral financing). FCTD does this all the time for experienced investors who often keep one or two properties unencumbered so they can quickly acquire properties with hard money financing.
If you need 100% financing to acquire a property (and do not own another property free and clear), check with your first mortgage lender to see if it allows 100% financing. Many lenders won’t allow 100% CLTV (which I covered in this blog post), including hard money lenders who want borrowers to have at least a 10-20% down payment.
If the first mortgage lender allows 100% CLTV, then ask your real estate agent if the seller would consider a seller carryback loan in second position. If the seller agrees, then you’re in business. If not, then it falls under the friends and family category rather than a hard money loan with a debt stack up to 100% CLTV.
Conclusion
My intent with this blog post is to redirect those who aren't a good fit for a hard money loan to the financing that will work for them, hopefully saving them time and hassle. Hard money loans are meant for real estate investors for business and investment purposes, not consumer purposes like a new primary residence, debt consolidation, or a chapter 13 bankruptcy buyout. With limited consumer hard money credit available —and very little information online explaining this — it can be frustrating for someone seeking a loan for their specific circumstances. If this describes you, hopefully I was able to clarify the financing solutions that are available for your needs.