Hard Money Lending vs. Traditional Lending
Let’s compare private lending with traditional to determine what may work for your situation.
The needs of a commercial real estate investor are not always met with traditional lending options. This is where hard money lending comes in. Also called private money lending, the loan is judged by the real estate collateral and the borrower’s credit profile is generally not a factor.
A hard money loan is issued by an investor (or investment group) who makes loans secured by real estate. While these loans typically charge higher rates than banks, the advantages are numerous. In fact, even investors and developers with access to bank credit and have strong financial statements often opt to use hard money loans (i.e., private money loans) for a variety of reasons.
Round 1: Speed
The ability of the lender to fund the loan quickly can be the difference between winning and losing a deal, especially if you’re trying to secure a property against other competing bids. A quick close with a hard money loan can entice sellers and set your offer apart from other buyers with slower, more conventional funding.
This is where hard money really shines. In most situations, these deals can be completed and funded within a week. Compare that to 45 days it takes to get a loan from a bank or credit union—and its really no contest. Not to mention, private lenders can even process an application in 1-2 days, and sometimes it can be completed the very same day.
Round 2: Structure
Private lenders can structure hard money loan repayment and collateral release terms in ways that are mutually beneficial to both lenders and borrower. Banks and credit unions aren’t as flexible and typically take a multipurpose (one-size-fits-all) approach to all loan requests. Hard money lenders will often structure loans based on a percentage off the purchase price or LTC (loan-to-cost) as well as the LTV (loan-to-value) with value being based on the quick-sale value of the collateral property. The maximum loan to value ratios are typically the lower of a 70% – 80% LTC or 60% – 70% LTV.
Round 3: Approval
If you’ve been turned down for a conventional loan due to past credit trouble, foreclosures, or a short sale, you know how frustrating it can be. Not to mention, there’s numerous reasons for denial banks can offer—even if your financial history is spotless (e.g., self-employment, new job and lack of income history,incomplete records). Hard money lenders are able to look past these issues as long the loan be repaid and the borrower has enough equity invested in the property.