Past data shows that borrowers have tended to gravitate toward traditional home loans for their real estate financing needs, unaware of alternative solutions available to them. But in recent years borrowers have realized that traditional home loans are both inelastic and expensive, which has led to the rise of both hard money and non-QM loans.
Hard money and non-QM loans have evolved over the years to become equally popular real estate financing solutions. Specifically, borrowers who have limited options have found hard money and non-QM loans to fill the need for flexible mortgage financing.
But when it comes to hard money vs. non-QM loans, many borrowers think they are one in the same. Yet, several features set these apart. Looking deeper and comparing hard money vs. non-QM loans, hard money clearly has the advantage.
Hard money loans are the preferred solution for borrowers seeking non-traditional mortgage financing. Offering several advantages over non-QM mortgages, hard money loans have become the go-to real estate solution for California borrowers.
This guide will deconstruct the features and benefits of hard money vs. non-QM loans, as well as outline why hard money clearly is the best solution to finance a California property.
What’s the Difference Between Hard Money vs. Non-QM Loans?
The growing demand for non-traditional alternative financing solutions has led to the rise of both hard money and non-QM loans. But while hard money vs. non-QM loans share a few similar features, there are several features that make these flexible lending solutions unique and different.
Hard Money Loans
Hard money loans, sometimes referred to as private mortgages, are a specific type of real estate financing available to borrowers as an alternative to traditional home loans.
Unlike other types of mortgage solutions, hard money loans are only available from hard money lenders, who are typically private investors, businesses, and organizations. Hard money lenders in California utilize an asset-based approach to lending, focusing on the underlying property being used as collateral over borrower characteristics such as employment history or credit score.
Another important feature of hard money vs. non-QM loans is that hard money loans are considered a short-term financing solution. Loan durations are typically 1 to 2 years compared to both traditional and non-QM loans, which can have loan durations for several years or more.
Borrowers also prefer hard money loans for their flexibility and speed. When looking at hard money vs. non-QM loans, hard money programs offer greater flexibility and quicker approval decisions.
Non-QM Loans
Non-QM loans, also known as non-qualified mortgages, are a type of real estate loan that don’t meet the federal qualified mortgage (QM) rules.
For a loan to be considered a qualified mortgage, lenders must determine it meets the “ability-to-repay” (ATR) guidelines. This includes verifying that a borrower can afford a loan through verification of their income and debts. This includes analyzing a borrower’s income, assets, employment history, monthly payment, other debt obligations, and credit history.
There are also several imposed restrictions on how qualified mortgages can be structured. Qualified mortgages cannot exceed a loan duration of 30 years, have interest only payments, or include a balloon payment or negative amortization schedule.
While non-QM loans have alternative qualifying criteria compared to qualified mortgages, they still involve intense scrutiny of a borrower’s income and credit. Borrowers are still required to provide countless financial documents for a non-QM lender to determine their eligibility.
Mortgages that meet the qualified mortgage requirements are considered to carry less risk, so non-QM loans are considered a riskier financing alternative.
Unlike hard money lenders in California, including hard money lenders in Los Angeles and hard money lenders in San Francisco, non-QM lenders still can come from traditional institutions, such as banks and credit unions. They can also come from individual mortgage companies or investment firms.
In general, non-QM loans cater to certain types of California real estate borrowers, such as those with non-traditional credit, self-employed individuals, or those with unique borrowing characteristics. While they offer more flexibility compared to traditional mortgages, they still require extensive documentation and rigorous approval process.
Despite their accessibly, non-QM loans still tend to share unfavorable features of traditional mortgage loans than hard money counterparts. For example, when looking at hard money vs. non-QM loans, non-QM loans still require longer loan durations, have stricter eligibility criteria, and have different approaches to repayment.
Comparing Costs: Hard Money vs. Non-QM Loans
Cost is always something to consider when deciding what type of mortgage will best meet your needs. Comparing hard money vs. non-QM loans, its important to consider both tangible and intangible costs when deciding whether hard money vs. non-QM loans are right for you.
Tangible Costs
One of the biggest tangible costs to consider when deciding between hard money vs. non-QM loans is the interest rate. In general, non-QM loans have slightly lower interest rates than hard money loans. But lower rates don’t always translate to lower overall cost. Other factors, such as upfront charges and fees are also tangible costs consider. Factoring all costs, the parity between hard money vs. non-QM loans is pretty similar.
Intangible Costs
When making a loan decision you should also consider intangible costs. Time is certainly an intangible factor where hard money has the upper hand over non-QM loans.
Looking at overall value, hard money lenders in California can approve borrowers for a hard money loan in minutes. Non-QM loans have a much more rigorous approval process and can take weeks to get approved for.
If you are looking to purchase a new California property, borrowers often choose to use hard money vs. non-QM loans because they could lose out on a deal while waiting for the non-QM financing to go through. Hard money allows you to quickly capitalize on new investment opportunities compared to other alternative financing options.
Advantages of Using Hard Money vs. Non-QM Loans
There are several advantages to gain from using hard money vs. non-QM loans. When comparing hard money vs. non-QM loans, hard money lenders in California have the upper hand with respect to loan duration, the approval process, qualifying criteria, and personalized service.
Loan Durations
It can be hard to find either a traditional or a non-QM real estate loan with a short loan duration. While non-QM loans offer greater flexibility than traditional mortgage solutions, loan durations often extend across several years (sometimes decades).
While you can sometimes apply for a shorter loan duration with a non-QM loan, it adds a layer of complexity to your application, often causing a lengthier approval process. At times you may even end up with a final balloon payment, forcing borrowers into precarious financial situations.
On the other hand, hard money loans are much more flexible and work best in complex financing scenarios or when you need funds quickly. Hard money lenders in California offer hard money loan durations between 1 and 2 years (or sometimes shorter).
Approval Process
When assessing whether to choose hard money vs. non-QM loans, its important to consider the approval process. Although they often allow alternative qualifying requirements, non-QM loans still require a lengthy approval process and have similar restrictions on income and credit that a traditional lender has. It can take several weeks to be approved for a non-QM mortgage.
It is much easier to get approved for a hard money loan since hard money lenders in California utilize an asset-based approach to lending. Often hard money lenders in California can approve you for a hard money loan in minutes, not days. Also, the qualifying criteria for hard money vs. non-QM loans is much more limited, making hard money loans much more accessible.
Credit Requirements
Hard money lenders in California have little to no credit requirements when qualifying you for a new hard money loan. That’s because they leverage an asset-based lending methodology, focusing more on the property securing your loan request.
Non-QM loans still have minimum credit score requirements and scrutinize a borrower’s credit history. Like traditional real estate loans, there may still be imposed restrictions on borrowers with derogatory credit events, including bankruptcies or foreclosures.
Personalized Service
Since non-QM loans are offered by mainstream lenders, such as banks, credit unions, and other independent mortgage companies, you’re often getting a solution from a national provider, with departments across the country.
Most non-QM providers have little knowledge of the local California housing market. Similarly, the experience is often exclusively online or over the phone, working with a representative whose department is thousands of miles away and that lacks a personal touch.
Hard money lenders in California typically work and live in California. They have intimate knowledge and expertise of the local market and work to develop a relationship with borrowers based on trust. Hard money lenders in California can provide a higher level of personalized service that you simply cannot get from a non-QM provider.
Hard Money Lenders, Independent Lending
When deciding between hard money vs. non-QM loans, hard money offers several advantages that you simply cannot obtain with a non-QM loan. Nevertheless, its important to find the right hard money lender in California to partner with to ensure you get the best value possible.
Independent Lending has over 40 years of combined mortgage experience crafting flexible hard money loan solutions for California borrowers in need of real estate financing. All our asset-based lending programs are free of upfront fees or hidden charges and come with unmatched world-class service.
Contact us today to discover how we can support your real estate investment goals!
