We have been getting a lot inquiries about hard money non QM loans. Up until recently hard money loans programs and non qualified mortgage products were separate but now their are some mortgage lenders rolling out a combination of the two. This article will explore the benefits and risk of hard money Non QM and the lenders that offer this type of real estate financing.

What Is a Hard Money Non-QM Loan?

A hard money non-QM loan bridges the gap between traditional lending and unconventional financing, offering an alternative to individuals or investors who do not meet the stringent requirements of conventional loans. This financing type primarily caters to borrowers seeking quick access to capital for real estate projects, such as property investments or renovations, without the rigid credit and income documentation required by banks.

Understanding Hard Money Loans

Hard money loans refer to short-term financing secured by real estate. Unlike conventional loans, the emphasis is placed on the value of the property rather than the borrower’s creditworthiness. Hard money lenders, typically private investors or companies, make swift lending decisions, offering funding within days rather than weeks. These hard money loans are often used for investment property flips, bridge financing, or home renovation projects​.

How Hard Money Lending Work

Consider hard money loans as a “race against time.” Their short repayment terms, usually spanning six to 36 months, require borrowers to act swiftly. Most hard money loan programs have higher interest rates ranging from 9% to 15% reflect the hard money lender’s elevated risk exposure, emphasizing the importance of having a solid repayment plan​.

What Is a Non-QM Loan?

A non-qualified mortgage (non-QM) loan deviates from the strict guidelines set by the Qualified Mortgage (QM) rule, which ensures borrowers have the ability to repay the loan under standard federal criteria. Non-QM loans provide flexibility by accommodating borrowers with irregular income streams, such as self-employed individuals, foreign nationals, or those with recent credit events like bankruptcies​.

Merging Hard Money and Non-QM Loan Programs: A Perfect Match

hard money non-qm

At the intersection of hard money lending and non-QM loans lies the hard money non-QM loan, a financing program designed for borrowers with unique financial situations that fall outside the QM framework. This type of non-traditional loan prioritizes property value and asset strength over the borrower’s financial history, offering a fast and flexible solution for real estate investors​.

Juxtaposition in Lending Options
Conventional loans are like running a marathon, requiring endurance through extensive documentation and verification. In contrast, hard money non-QM loans resemble a sprint, prioritizing speed and flexibility over rigid financial scrutiny. Borrowers willing to trade higher interest rates for faster access to capital find these hard money loans appealing.

Key Features of Hard Money Non-QM Loans
Flexible Eligibility Criteria:  Non-QM hard money loans cater to individuals with non-traditional income sources, such as entrepreneurs, investors, and gig economy workers. Credit scores, tax returns, or W-2s are often secondary considerations, and non QM lenders instead focus on the value of the property being financed​.

Quick Approval and Funding
One of the primary advantages of hard money non-QM loans is the rapid approval process. Borrowers can often secure hard money loan funding within days, making these loans ideal for time-sensitive investment property opportunities​. Bank statement mortgages have become popular alternative financing to the stated income loans offered by subprime lenders years ago. Take advantage of competitive pricing for borrowers that can provide bank statements instead of tax returns.

Short Loan Terms with High Interest Rates
These loans typically come with short terms of six months to three years and higher interest rates, reflecting the increased risk involved. Borrowers need to plan exit strategies carefully, such as selling the property or refinancing through a traditional loan​.

Higher Loan-to-Value (LTV) Ratios
Hard money non-QM lenders generally allow LTV ratios of 60% to 80%, meaning borrowers may need to provide significant equity upfront. This requirement ensures that hard money lenders have a buffer in case of market fluctuations​.

Benefits of Hard Money Non-QM Loans

  • Speed and Convenience: For real estate investors, time is often of the essence. Hard money non-QM loans streamline the borrowing process, bypassing the lengthy application procedures typical of traditional lenders.
  • Greater Flexibility: These hard money Non QM loans offer flexibility in loan terms and eligibility criteria, accommodating individuals with non-conforming financial situations. They are particularly advantageous for self-employed borrowers and those with credit challenges​.
  • Bridge Financing Solution: Hard money non-QM loans serve as an effective bridge between the purchase and long-term financing of real estate properties. Investors can secure properties quickly and later refinance with traditional loans​.

Risks and Considerations with Hard Money Non QM

  • High Interest Rates and Fees: The higher interest rates and origination fees can make hard money non-QM loans more expensive than conventional loans. Borrowers must assess whether the potential returns justify the added costs​.
  • Short Loan Terms and Payment Pressure: Borrowers must repay or refinance these loans within a short timeframe, which may create financial pressure if the real estate project takes longer than expected.
  • Risk of Collateral Loss: Since these hard money loans are asset-based, defaulting on payments could result in the loss of the property used as collateral​.

How much equity do you need to qualify for hard money non QM?

The amount of equity required to qualify for a hard money non-QM loan typically depends on the loan-to-value (LTV) ratio set by the hard money lender. Most private lenders offer loans with LTV ratios ranging from 60% to 80% of the property’s value. This means you’ll need 20% to 40% equity in your property to secure the non-QM hard money loan. For example, if your property is valued at $500,000, you may need to have at least $100,000 to $200,000 in equity to qualify.

Some key points to consider include:

  1. Stricter LTV Ratios for Higher-Risk Borrowers: If your credit score is low or you have recent financial challenges (such as bankruptcy), the lender may require a lower LTV—closer to 60%—to mitigate their risk.
  2. Property Type and Condition: LTV ratios may also vary depending on whether the property is residential, commercial, or intended for investment purposes. The condition of the property plays a crucial role in determining the available equity for lending.
  3. Loan Purpose: If the loan is intended for a real estate flip or a short-term bridge loan, lenders may offer higher LTV ratios due to the quick exit strategy involved.

Always consult with multiple hard money lenders to understand their specific LTV requirements and whether they align with your financial goals. Non-QM lenders vary widely in their criteria and may offer more favorable terms based on your unique financial situation.

Are Non QM mortgage loans good for investment properties?

Non-QM and hard money loans are very popular with real estate investing. While these non qualified loans may come with higher mortgage rates, closing costs and fees, they can provide the capital needed to finance investment properties for borrowers who do not qualify for traditional financing.

What Is a DSCR Loan?

This non traditional loan is very popular with real estate investors. The debt service coverage ratio loan type benefits borrowers who may not qualify for traditional loans due to fluctuating or non-traditional income sources. Rental property investors who rely on rental income rather than W-2s or tax returns often use DSCR loans to finance investment properties more efficient.

Takeaways on Hard Money Non QM Loans

In the world of real estate financing, a hard money non-QM loan is like a versatile tool that bridges the gap between opportunity and traditional lending constraints. It offers speed, flexibility, and convenience, albeit at a higher cost. These loans are particularly valuable for investors with unique financial situations, providing an alternative pathway to secure real estate deals that would otherwise be out of reach. However, borrowers should carefully consider the private money loan risks, costs and have a solid exit strategy to ensure they reap the benefits without jeopardizing their investment.

References

Consumer Financial Protection Bureau. (n.d.). Ability-to-Repay and Qualified Mortgage Rule.
https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/ability-repay-qualified-mortgage-rule/

MoneyThumb. (2024). Understanding Non-QM Loans And Who They Benefit.

 

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