Fact: Hard Money Lenders Will Do What Banks Often Won’t

Perhaps you’ve heard that hard money lending is a last-resort option for people incapable of obtaining conventional bank loans. It is not true. It only looks that way because hard money lenders will do things that banks often will not. At the core of the issue is how conventional lenders do business, not the creditworthiness – or lack thereof – among borrowers.

You are about to learn the difference between hard money lenders and their conventional counterparts. In order to make it easier, we are going to focus on one particular type of borrower: the real estate investor.

I have chosen the real estate investor because, according to Utah-based Actium Lending, the vast majority of all hard money loans are used to obtain investment properties. Simply put, real estate investors are the hard money industry’s biggest customers.

Financing Investments With Conventional Loans

Right from the start, choosing a conventional lender puts a real estate investor at a disadvantage. It is all because banks and other conventional lenders are nervous about financing investments.

A lot of banks simply won’t touch investment projects. Those that do end up being very conservative in their loan offers. This works to a real estate investor’s disadvantage. But remember, this has nothing to do with the investor’s creditworthiness. It’s simply a matter of risk. Conventional lenders see too much risk in financing investment properties.

Hard money lenders recognize those same risks. But they will take the risks in order to earn the payoff. Moreover, their lending practices are built to mitigate risk in ways banks cannot. That makes them more comfortable with financing investments.

Hard Money Lenders Focus on Assets

The differences between hard money and conventional lenders go further than just risk aversion. Their lending models are fundamentally different. Hard money lending is asset-based. This means that lenders make approval decisions primarily based on the value of whatever asset is being offered as collateral. In a real estate scenario, the property being acquired almost always acts as collateral.

Conventional lenders do not make approval decisions in the same way. They couldn’t, even if they wanted to. Banking regulations force them to demonstrate a borrower’s creditworthiness prior to approving a loan. That’s why they need to ask for so much documentation. It’s why they look into credit scores and histories, income, debt loads, and so on.

The big struggle for real estate investors is that they don’t have traditional income. They make their money as returns on their investments. So it’s nearly impossible for them to demonstrate traditional income to a bank. Even the wealthiest investors struggle to demonstrate income. That’s problematic for banks.

Hard Money Lenders Can Close Quickly

Another thing hard money lenders can do that banks cannot is closed quickly. How quickly? That depends on circumstances. Actium Lending has the ability to get from approval to closing in a single business day when extreme circumstances dictate doing so. However, the norm is 5-10 days.

A real estate investor could never close a conventional loan that quickly. You’re talking at least 45 days in most cases. Banks can take upwards of 90 days in some instances. This is a challenge for real estate investors because they don’t have that kind of time. Investment properties go quickly, so investors need to be able to move fast.

Although the perception of hard money is that it is an option of last resort, nothing could be further from the truth. The reality is that hard money is ideally suited for certain kinds of borrowers because it can do things that conventional lending cannot. That’s what makes it so attractive.