Dallas Fort Worth Area Homes and Real Estate

In these days of contracting credit in the mortgage market, investors who either can't document their income or who already own more than the Fannie Mae/Freddie Mac limit of four properties are left with little choice but private or "hard" money to finance their purchases.   There is simply no money available to private individuals via loans that are insured by the GSE's or any other type of government agency, nor is there any demand on the secondary market for speculative mortgages. 

Credit score requirements for many conventional loans have also risen, and Fannie Mae and Freddie Mac are assigning much larger rate adjustments for investors putting less than 20-25% down. 

So what exactly is a "hard money loan" anyway?  It's basically a loose term that applies to any kind of loan that's backed with real estate and does not conform to the guidelines of any major loan purchaser, such as Fannie Mae or Freddie Mac, who sells loans on the secondary market.  Hard money loans are typically loans made by either wealthy individuals, private equity firms or small, independent banks who choose to invest a portion of their portfolio into real estate transactions that offer a high rate of return and also a high turnover rate.  The terms on hard money loans are whatever the lender wants them to be, but usually range from just a few months to no more than ten years at the longest. 

So where should investors look for hard money?  The first stop should be their personal banker where they have their business accounts.  Typically the smaller, independent banks have more latitude to approve hard money loans since the decision makers are on-site.  They will typically want to see that an investor has substantial experience buying and selling homes for at least the last two years and they will usually require, at the very least, some type of time deposit account to be opened, such as a CD. 

If they can't find any small, independent banks that are willing to loan them money to purchase investment properties, they should try finding hard money sources on the internet by googling "hard money".  There are many small institutions and wealthy private individuals that are looking to invest their money in short term real estate backed loans with high rates of return. 

ADVANTAGES OF HARD MONEY LOANS OVER TRADITIONAL MORTGAGES

Despite the fact that hard money loans are almost always more expensive to obtain than traditional mortgages, there is some additional flexibility that may come with them that's not available on traditional mortgages.  For starters, many hard money lenders may allow for bulk purchases of properties all at once, whereas a traditional mortgage would require seperate loans for each property.  Furthermore, some hard money lenders may provide cash for needed repairs and cosmetic updates to the properties.  Also, many hard money lenders won't require each transaction to be seperately underwritten, unlike getting a traditional mortgage.

WHEN DO HARD MONEY LOANS MAKE THE MOST SENSE?

Investors who purchase income-producing properties usually have one of two goals in mind: Keep the property as an income-producing rental property or fix up and sell the property (FLIP) for a quick profit.  Investors looking to flip properties will usually find hard money loans to be the most flexible form of financing since there are usually less limitations on individual properties, such as property condition, location, etc.  The less attractive terms on hard money loans are less of an issue for investors looking to flip properties since they are only going to keep the houses for a short time.  Investors looking to keep properties as rentals for the long term may use a hard money loan to initially purchase the property, but the higher rates and shorter terms that usually come with hard money financing make hard money loans much less attractive than traditional mortgages over the long term.  Most investors who purchase rentals with hard money loans will want to refinance the hard money loan into a traditional mortgage with better terms and rates. 

STRATEGIES FOR INVESTORS LOOKING TO KEEP RENTAL PROPERTIES

In today's tough mortgage market, investors who have four or more mortgaged properies and are looking to acquire rental property for the long term have come up with some crafty ways to circumvent those limits.  Here are some popular strategies that some investors are using to get around this issue:

• Partner up with a close family member who also wants to invest in rental properites and doesn't already have four mortgages in their name. 
• Use a spouse to qualify if the spouse doesn't have four mortgaged properties.
• Seek partners who have investment experience, but always consult with an attorney to make sure your interest in the property is protected. 

If you are a hard money lender, or know of lenders that are actively lending hard money for investment property loans, feel free to comment and leave some information!