Affluent Borrowers Using Hard-Money For Boulder Real Estate?

Some borrowers with challenging credit issues are not at the lower end of the financial spectrum. Buyers of Boulder real estate may pay higher interest if they don’t have enough cash.
There are many borrowers such as the self-employed who have to consider alternatives. In some cases borrowers fall into what has been called the sub-prime category because they’re intending to borrow a high amount of money (over $417,000).

The Wall Street Journal reports that “Hard-money mortgages” are gaining popularity among more affluent borrowers:

  • They’re best suited for borrowers with weak or no credit records or whose income is hard to substantiate.
  • They’re often used for short-term financing.
  • Downsides include steep interest rates and fees.

These types of mortgages were once thought of as a last resort for strapped borrowers, these products are also called “private-money mortgages”. The have different lending standards than traditional mortgages and they carry substantially higher interest rates and fees.

I’ve seen investors use hard-money loans for short term projects that might not qualify for a conventional mortgage when looking for money to finance a large remodeling project for a fix-and-flip. While those kinds of investments aren’t as common lately in the Boulder area. There’s an atypical project that doesn’t appear in the typical shows on HGTV. Boulder has seen many of the older homes that were typically smaller less modern styles of construction getting picked up for between $400k and $600k and then getting a major rebuild to end up on the market in the $1,000,000 plus price range.

The hard-money loans are attracting a larger, more affluent group of consumers as the sub-prime loans these borrowers would otherwise qualify for are less available. “Now that subprime has basically disappeard, the har-money lenders are pretty much the only source of capital for many people,” says Daniel Yeh, a mortgage-industry analyst at the Scotsman Guide, a trade publication based in Bothell, Wash.

Unlike a traditional mortgage, which is defined largely by credit scores and a borrower’s ability to repay, hard-money mortgages are based almost entirely on the value of the underlying asset.

The home-appraisal process is more intense, as well. Since these types of lenders base their underwriting on the collateral, they analyze the property and local market data more carefully than traditional lenders.

Many hard-money borrowers are people of means who have substantial equity in their home, investment properties and their own businesses. Because the fall into the lower credit tier, they are now unattractive to the same lenders that may have worked hard to attract these same borrowers with sub-prime loans prior the the big mortgage business changes in the autumn of 2007.

Here are some tips from the WSJ on “How To Wrangle a Mortgage”:

If you’re having trouble finding a traditional mortgage, a so-called hard-money lender may be your only option until the credit market recovers from the current sub-prime lending crisis. Here’s what you need to know:

  • Consumers who need quick access to financing to close on a property or to refinance in a hurry are good candidates for a hard-money mortgage.
  • You need substantial equity in your property, since hard-money lenders universally demand that borrowers own at least 30% of the property being mortgaged.
  • Be prepared to pay high interest rates and fees. Rates on hard-money mortgages are generally in the low teens, and fees can run as much as 5% of the loan’s value.
  • Continue to shop around for a traditional mortgage. Because the interest rates are so steep on hard-money mortgage, you will want to refinance as soon as you can into a traditional mortgage, where interest rates will be substantially cheaper.

More informative reading is available at the Real Estate News and Market Updates sections.


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