If you’re looking to purchase an investment property, a mortgage from a traditional lender may seem like an obvious place to start.
You can call your bank, provide them with some information about your purchase, and be on your way.
Unfortunately, this doesn’t often happen. Bank mortgages are generally conforming loans, which must meet strict guidelines.
In this article, we’ll explain the differences between conforming loans and non-conforming loans, such as hard money, so you can make the best decision for your future purchases.
Start your application with Park Place Finance.What is a conforming loan?
Congress created Fannie Mae and Freddie Mac to “provide liquidity, stability, and affordability to the mortgage market.”
These entities don’t issue loans directly but purchase loans from lenders.
However, to be eligible for purchase, the loans must “conform” to certain standards—this is where the term “conforming loan” originated.
Conforming loans must meet certain criteria, including:
- Loan limits: Caps on loan amounts, which vary by location
- Credit score requirements: Minimum scores generally need to be at least 620, but this can vary by lender
- Debt-to-income (DTI) ratios: DTI ratio is ideally below 43%
Conforming loans also require income, asset, and employment documentation, including tax returns, W-2s, bank statements, and other documentation to verify a borrower’s ability to repay the loan.
The most common term length for conforming loans is 30 years.
Situations where conforming loans work best
Conforming loans are popular among homebuyers because they are a predictable, affordable option that offers security and stability to lenders and borrowers.
However, they generally work best in specific borrowing scenarios.
Purchasing a primary residence
Homebuyers who meet traditional income, credit, and down payment requirements are perfect candidates for conforming loans, especially if they plan to live in the home long-term.
Financing properties within the loan limits
Minimum baseline conforming loan amounts in 2024 for one-unit through four-unit properties are as follows:
- One-unit: $766,550
- Two-unit: $981,500
- Three-unit: $1,186,350
- Four-unit: $1,474,400
Investors or homebuyers who want to purchase a property within these limits may be able to finance it as long as they can meet the other requirements.
Buy-and-hold strategies
Long-term, fixed-rate conforming loans may suit investors who plan to purchase and hold a property for several years and benefit from a steady cash flow and appreciation.
They may also be helpful for new investors who intend to purchase a two-to-four-unit property and live in one of the units.
Limitations of conforming loans for real estate investors
While certain investment situations could work for conforming loans, a wide range of scenarios would be difficult or impossible to finance.
Let’s look at how conforming loans are limited in helping investors achieve their goals.
Slow approvals
Real estate investors often require fast funding to close deals quickly.
Conforming loans have a more extensive approval process that can take several weeks or even months, resulting in potential delays and missed opportunities.
Loan limits
Investors who want to purchase high-value or luxury properties, particularly in competitive markets, can find conforming loan limits restrictive.
Strict income requirements
Real estate investors who rely on rental income or investment portfolios may find it difficult to meet the strict income requirements for conforming loans.
They also may have higher DTI ratios or lower credit scores due to their investments.
Rigid terms
Real estate investments often involve distressed properties, renovations, or new construction.
Conforming loans are designed for safe, straightforward, long-term purchases rather than higher-risk, higher-reward, shorter-term financing needs.
Hard money loans: The investor’s alternative
If conforming loans are so limited, what is the investor’s alternative?
Hard money loans are a powerful, non-conforming financing alternative ideally suited for real estate investing scenarios, including renovation projects, bridge financing, and new construction.
Hard money loans are asset-based, meaning the main factor in approval is the property’s value used as collateral.
Hard money loan benefits include:
- Speed: Loans often can be approved within days
- Flexibility: Approval largely hinges on the property’s current value or after-repair value (ARV)
- Short-term and long-term options: Loans are structured to the project’s unique needs, such as short-term renovations or long-term rentals
Hard money lenders like Park Place Finance are experienced in structuring loans for various investment needs and goals.
These lenders bridge the financing gaps that traditional institutions are unwilling or unable to meet.
Are hard money loans better for investments?
Hard money loans offer advantages that conforming loans simply cannot match, particularly when it comes to distressed properties or projects that require quick decisions.
Distressed property investments
Conforming loans have strict property condition requirements, ensuring the financed properties are safe and habitable.
Many real estate investments focus on renovating properties and either selling them for a profit (fix-and-flip) or turning them into rentals (fix-and-hold).
Hard money lenders can focus on a property’s potential value post-renovations, which allows investors to secure funding and complete their projects.
Bridge financing
Hard money lenders can structure bridge loans, which provide funding that “bridges the gap” between the sale of one property and the purchase of another.
The fast capital from this type of loan allows investors to quickly move forward with time-sensitive opportunities, buying them the time and resources they need to complete a deal. At the same time, they wait for a permanent source of financing.
Auction purchases
If you secure a property at auction, you are required to pay immediately.
This is nearly impossible to accomplish with traditional financing but simple and easy for hard money lenders.
Short-term and long-term rentals
Investors can use hard money loans to secure short-term and long-term rental properties, even if they need hefty renovations or fast acquisition.
They allow you to purchase a rental property, renovate it, and then refinance to a long-term loan.
New construction
How about having the freedom to build your own investment property?
Investors can use hard money loans to purchase land and cover construction costs, with the added benefit of the speed and flexibility that traditional loans don’t have.
Apply today with Park Place Finance
What’s your unique investing scenario?
Park Place Finance is your trusted hard money lender for your next property.
We offer a range of hard money options, including fix-and-flip, DSCR, bridge financing, and new construction.
If you’re ready to experience the benefits and versatility of non-conforming loans for your investments, get a quick rate quote or call us at (866) 407-1599.