The United States faces a persistent shortage of affordable and workforce housing, particularly in established neighborhoods close to jobs, transit, and infrastructure. Although various zoning and land-use reforms have been enacted or proposed to enable modest increases in density—often described as “missing middle” or “light-touch density” housing—financing construction of these smaller, scattered-site homes remains a fundamental bottleneck. Large builders funded by the capital markets are poorly suited to this niche, while community and regional bank construction lending has continued to retreat. This report documents an unlikely and understudied source of capital that is helping fill that gap: residential transition lending.
Residential transition loans (RTLs)—modern successors to what was once known as “hard money” lending—are short-term, asset-based, business-purpose loans used primarily by small builders and real estate investors to renovate aging homes or to construct new one-to-four-unit and small multifamily properties. Using a wide range of proprietary and public data, this report finds that RTLs have evolved from a local, informal market into a sizable and increasingly institutionalized sector. In 2025 alone, more than $85 billion in RTLs were originated, including more than $25 billion for ground-up construction and more than $35 billion to rehabilitate existing housing stock. Importantly, this activity is disproportionately concentrated in infill locations and aging neighborhoods.
The report traces how regulatory and market changes following the 2008 financial crisis, tightening bank credit, and rising institutional investor interest collectively spurred the sector’s growth. Over time, residential transition lending has attracted large-scale capital, including from insurers, real estate investment trusts, and private equity, culminating in the emergence of rated RTL securitizations beginning in 2024. These developments have lowered funding costs, increased transparency, and imposed greater discipline on underwriting and operations, further professionalizing the market.
A central finding of the report is the rapid expansion of ground-up construction lending within the RTL sector. Once dominated by fix-and-flip loans, residential transition lending is now financing tens of thousands of new homes annually, often built by small, local builders who lack access to traditional construction loans or who prefer RTLs. These projects tend to be modest in scale and cost, making them compatible with affordability constraints and neighborhood context while adding incremental housing supply.
At the same time, the report emphasizes that residential transition lending’s evolution does not fully mirror that of other mortgage markets. Despite growing institutional involvement, much of residential transition lending remains rooted in local, balance-sheet lending relationships characterized by speed, flexibility, and deep market knowledge. This local orientation, combined with short loan durations and significant risk retention by lenders, may help preserve underwriting discipline and mitigate some of the risks seen in past rapidly growing credit sectors.
Ultimately, residential transition lending is not a panacea for the nation’s housing shortage. But it is a meaningful, unsubsidized, and scalable complement to traditional bank finance and public programs. By enabling small builders and investors to construct and preserve tens of thousands of homes each year, residential transition lending represents a quiet but consequential contributor to housing supply—and a sector policymakers should better understand as they consider broader pro-housing reforms.
