Real estate has long been seen as a safe place for investors to put their money, generate wealth and hedge against instability in other asset categories. The problem in recent years is that as the market continues to grow, access to it has similarly been compromised.
This issue is only amplified for everyday buyers who aren’t interested in buying a home as an investment, but simply want to own the place they live. Getting approved for a traditional mortgage is hard enough if you have a full-time job in a reputable field. If you’re self-employed or have any other type of background that makes you less desirable to banks as a prospective customer, options can seem vanishingly small.
Thankfully, there are a number of alternative lending avenues open to investors and buyers with these differing needs and circumstances. And this is no small movement; we’re seeing the entire market rebalance in response to what’s possible now.
Here’s a look at the types of lending packages on offer that exist outside of the incumbent mortgage market, who they’re suited to, and how they’re reconfiguring the real estate sector right now.
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Levelling the Playing Field with DSCR Loans
It’s rare for investors to cover the cost of commercially-oriented real estate transactions outright, but this remains a rarefied world that few have access to because of the upfront capital required to secure standard loans in many instances.
That’s where Debt Service Coverage Ratio (DSCR) loans make an entrance as an accessible alternative. They take into account the potential cash flow that the property in question represents, rather than the income or existing assets of the applicant. Thus, the bar for approval is lowered, and the process of getting verified as eligible is simplified.
Let’s say you want to buy a property to rent out. So long as the projected rental income from the property outstrips the ongoing expense of repaying the loan and keeping up with your responsibilities as the landlord, a DSCR deal should be within reach.
This is the type of alternative loan that innovative providers like Griffin Funding specialize in offering to clients. So if you’d rather not wrangle with mortgage applications in order to go through with an investment property purchase, definitely give DSCR loans a look.
Catalyzing Property Purchases with Hard Money Loans
They sound a little scary on a superficial level, but hard money loans are actually a dream option for buyers who want to strike while the iron’s hot, rather than missing out on a property that’s perfect for their needs.
The main target audience for hard money loans is house flippers; those who buy properties cheaply, renovate them in a short time frame and sell them for a profit. This type of loan is again not reliant on income for eligibility, but instead bases approval on the value of the property in question. It also has a higher typical interest rate than an equivalent mortgage, as well as a shorter repayment period to counteract this.
A hard money loan is not appropriate for anyone aiming to buy their forever home. But if you are set up to buy a property as a short-term fixer-upper project and have solid plans in place to flip it, the drawbacks are minimized. At a time when there are AI tools for simplifying finance processes, it’s also much easier for anyone to establish property-related business plans that are destined for success.
Breaking Down Boundaries with VA Loans
The Department of Veterans Affairs provides support to the men and women who’ve served the country in the military, including through home loans that are more accessible and less stringent in terms of the application and approval process.
Both veterans and active-duty members of the military may be eligible for a VA loan. In many cases, the benefits include lower interest rates, minimal or no down payment, and no need to worry about costs associated with private mortgage insurance.
The purpose here is to provide veterans an easy way to transition into civilian life while still having a stable financial foundation available to them. If you can apply for a VA loan from a lender that offers one, it’s definitely worth considering for these reasons.
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Accommodating Self-Employed Applicants
Another cornerstone of the alternative lending scene is the availability of home loans geared towards those who are self-employed or run their own businesses, of which there are 16.5 million people that fit this description nationally. Even students are taking remote jobs to make ends meet.
The need for packages that cater to this demographic is obvious, since traditional mortgages are rarely a good fit for people in this category due to the requirements for proof of income. Self-employed people can suffer from peaks and troughs of earnings that don’t make their short-term financial stability look that rosy, even if their long-term prospects are more than adequate for mortgage approval by most other measures.
With a lending package set up to serve freelancers, there’s much more focus on the bigger picture. For instance, having a good credit score and annual tax returns, which indicate income that’s remained consistent over time, is far better than being asked to provide a monthly payslip when one simply isn’t available.
More than anything, this is an incentive to encourage people to pursue their dreams of becoming self-employed or pursuing a business idea of their own, rather than sticking with their 9-to-5. When there’s no reason to feel that this will hold you back from home ownership, it’s good news.
What this Means for the Market
The housing market is in a strange place at the moment for many reasons, and price growth is expected to sit at around 3% this year. Regardless of the uncertainty and the potential for upheavals to come out of nowhere, what’s apparent is that alternative lending options have definitely made their mark on this sector in recent years.
It could be argued that because traditional mortgages are not the only thing determining whether or not people can get a property loan, prices have been able to keep on increasing steadily rather than dipping. We’ve seen rate spikes, and some states have mortgage approval rates of just over 52%, according to the National Association of Realtors. But since borrowers can look elsewhere, this has not resulted in market stagnation, as might have been expected in previous decades.
It’s always tricky to make predictions about what might happen to the real estate market in years to come, let alone shorter periods. However, there’s every sign that alternative lending options are here to stay, providing more borrowers with access to an arena that they’ve previously been excluded from. That has to be a positive thing, even if those who are just getting their foot on the property ladder might prefer for prices to come down a little.
The Last Word
In short, property investors and aspiring homeowners alike no longer have to kowtow to the requirements and complexities of traditional mortgages. Alternative lending providers of all shapes and sizes are out there, with packages adapted to the needs of customers who would otherwise be left out in the cold.
There are still costs and risks associated with taking out a loan to buy real estate, regardless of your intentions. Even so, proper planning and risk management make this process more attainable and advisable than it ever has been.
