More Buyers Turn to Investors for Hard-Money Loans

More and more investors are pulling money out of retirement and saving accounts to use their own money to make mortgage loans to home buyers who banks reject. These hard-money lenders charge borrowers higher interest rates, but are becoming an answer for some home buyers who can’t get approved for a loan otherwise due to tighter credit restrictions.Guy D. Cecala, publisher of trade publication Inside Mortgage Finance, says hard-money loans are up significantly from a few years ago.

Joey Messina, an attorney in Dallas, told The Wall Street Journal that he has funded 20 mortgages — ranging in size from $40,000 to $102,000 — in the past two years. The mortgages carry interest rates of 14 percent, which is more than double what most banks charge in interest.

Some borrowers in particular have had a harder time getting loans since the housing market crash and banks started tightening their lending requirements. For example, other investors and self-employed individuals who can’t fully document their incomes and home buyers with low credit scores may face the most hurdles from banks.

Hard-money lenders must abide by the same mortgage rules as traditional lenders. Still, the nonprofit housing organization NeighborWorks America cautions home buyers considering a hard-money loan to consult with an unbiased housing or credit counselor to analyze the rates and terms to make sure these loans don’t qualify as predatory subprime lending.

Source: “Investors Who Do a Few Mortgages on the Side,” The Wall Street Journal (July 21, 2011)