Recent years have seen major growth in the private capital market with more lenders offering hard money loans and more borrowers seeking them out as alternative financing. While there are many reasons for the growth in this segment of the real estate market, here are four main ones:

1. Mutually beneficial to borrower and lender. Hard money loans have advantages for both the borrower and the lender. Borrowers get financial flexibility and have faster access to funds than conventional lenders can offer, which counters the higher costs of these loans. Lenders are rewarded for funding higher risk projects with higher returns on their investment.
2. Credit availability. Many borrowers still have blemishes on their credit histories from the recession, making it more difficult to obtain financing through traditional means. Even for borrowers who haven’t had credit problems, the increased restrictions on commercial lending by banks have made it difficult to obtain financing for projects that don’t fit their narrow guidelines. Hard money loans typically have less red tape, fewer guidelines and a faster process making them appealing for borrowers who need funds quickly.
3. Asset-based underwriting. Private lenders look at more than just a borrower’s credit score. They base their decision on a thorough analysis of both borrower and project and the borrower meets directly with the decision-maker rather than a middleman as often happens with bank loans. In addition, because hard money loans are secured by the real property, it can also be possible to obtain non-recourse loans in certain situations. Private lenders also have the flexibility to choose whether to use the purchase price or the appraised value to set the LTV (loan-to-value) rate of the borrower’s loan, and most will favor the higher of the two rather than the lower one as banks must.
4. Higher returns on investments. Funding hard money loans has grown in appeal for investors who want higher returns than are usually obtained through more traditional investments in the stock market. Many private lenders operate funds that investors can contribute to, allowing them to enjoy higher returns without the hassle of directly investing in real estate or underwriting the loans themselves.

Overall, the increased popularity of hard money loans is beneficial to both borrowers and lenders as this niche lending market provides financing for investment opportunities that might otherwise go unrealized.

If you have questions about how Montegra’s hard money loan programs can benefit you, contact us at 303-377-4181.