10 Benefits Of Working With A Hard Money Lender

If you’re a real estate investor, you know that you require a significant amount of money to acquire an asset. While a bank can grant you a loan, the process can be long and complicated. Not to mention, the restrictions in place to get an investment property loan approved and the lack of urgency from the bank.

In addition, your credit score and other requirements will determine whether you qualify for a loan. That’s where hard money loans come in. Rather than deal with the level of complexity that banks have, you can seek the help of hard money lenders.

What Is a Hard Money Loan in Real Estate?

A hard money loan in real estate, also known as a bridge loan, is a short-term secured loan that uses the property you’re buying as collateral. This type of lending instrument is often used by house flippers, real estate developers, or business owners whose goal is to renovate or develop a property and then sell it for profit.

You won’t find such lending instruments from a conventional bank, whose main measure of qualifying for financing is your creditworthiness. Hard money lenders use the property’s value to determine whether to issue the loan.

In addition, traditional banks base the loan amount on the home’s current value, and cannot estimate the property’s perceived value after repairs. Hard money lenders, on the other hand, look at the “after-value repair” (AVR), which is an estimate of what the property will be worth after the renovations or development stage is complete.

Top Benefits of Working with a Hard Money Loan

Using a hard money lender to acquire a loan to secure a real estate property has several benefits. Here are the top 10:

Speed and flexibility in obtaining funding

The topmost benefit of opting for a hard money loan is the speedy approval process. As an investor, speedy funding can help you close a deal quickly. Hard money loans are way faster than using a conventional bank, and you can get your cash typically within five days. There are no complex procedures or guidelines involved.

In addition to being fast, hard money lenders have better flexibility than banks that follow strict lending policies. A hard money lender can customize a loan that works with your timeframe and budget. Banks, on the other hand, prefer longer-term loans with less risk.

Funding of properties that may not qualify for traditional lending

One great thing about working with a hard money lender is the chance to get funding for a project that normally wouldn’t be approved by a bank. A good example is house flippers, who buy fixer-uppers, rehab them, and sell them at a profit. An investor will need a quick short-term loan to make the necessary repairs and upgrade the property so it can be put up for sale.

Banks can’t offer a fix and flip loan due to the risks involved. A bank has strict policies regarding property purchases, and certain issues may prevent an investor from qualifying for a loan. Issues related to plumbing, foundation, or electrical may lead a bank to rule the house as inhabitable and, therefore, deny you funding.

What’s more, a real estate investor usually requires a 12-month loan, which to most banks is short-term. Banks prefer lending money for the long term and are content with making small amounts of interest over a long period.

No minimum credit score requirements

Your credit score is one of the main determinants when applying for a loan. It’s no secret that you require a good credit score to qualify for a bank loan. With hard money lenders, you don’t have to worry about your credit scores.

Basically, they don’t take your credit score and debt-to-income ratio into consideration. Even if they do, their main focus will be the property you offer up as collateral, and you won’t be penalized for past mistakes.

Hard money lenders will address your current proposal and be more willing to take a risk compared to a bank. Furthermore, most banks won’t lend to a borrower who already has four mortgages, regardless of how perfect the borrower’s credit score is. Hard money lenders make decisions based on the profitability of the property you want to purchase.

No income verification

The source of income is among the strict policies banks follow. If you’re self-employed, you’ll need to have a good source of income to show your ability to repay the loan. If employed, you may require at least two years of employment history and have a stable job to get your loan approved.

So, if you don’t have the best employment history or the most stable job, and want financing to purchase a property, you’ll have a better chance with hard money lenders.

Usually, they won’t ask for income verification since the subject property will act as collateral, which is sufficient to process your loan.

Lower documentation requirements

Banks have a very long list of requirements to approve a loan, which seems to grow longer with every passing year. It’s the most frustrating part of the paperwork process when applying for an asset loan.

Some of these documents include:

• Employer and income verification documents, like tax returns, pay stubs, bank statements, and employer’s contact information (if employed).
• Proof of address documents, such as mortgage statements, utility bills, and proof of insurance on your home.
• Loan history.
• Business financial documents.

A hard money lender is more interested in the property’s value than your credit history, loan history, or income. They will calculate the risk and determine whether to approve or turn down the loan.

Ability to close deals quickly

When applying for a loan through a bank, it can take up to 60 days, or even more, to get approved. If you’re in business and looking to close a deal quickly, that money won’t benefit you. With a hard money lender, the process is quick, and you don’t need to produce tons of documents or wait for a long approval process.

Most hard money lenders can close a deal in as little as 3-5 days if the title is ready and all the paperwork is in order. Knowing how good deals can come up unexpectedly, it’s important to have access to a quick source of funding.

Investment properties funding

A bank can only lend on a property that fits within their lending criteria. Anything that goes beyond their stringent guidelines gets declined. For one, properties deemed uninhabitable are not eligible for bank financing.

Hard money lenders cater specifically to investment properties and, therefore, have a better understanding of the process of investing in real estate. That’s why they are willing to issue a loan for a property that has issues with a bank. Investors use hard money loans for commercial and residential properties. In some cases, hard money lenders provide construction loans.

Potential for higher loan-to-value ratios

A loan-to-value (LTV) ratio is a financial measurement comparing the mortgage amount to the value of the property you’re purchasing or refinancing. Lenders use LTV to gauge a borrower’s potential risk. Generally, the higher the loan-to-value ratio, the more the risk to the lender since it means providing more funds to secure the property.

Typically, lending agencies prefer an LTV ratio lower than 80 percent and tend to offer better loan terms to low LTV. A higher LTV ratio, on the other hand, may require you to pay mortgage insurance.

Some lenders, however, particularly hard money lenders, support higher LTVs. They can let you borrow money up to 95 percent of the property’s value, meaning you could make a very low down payment.

Less strict underwriting guidelines

Real estate underwriting is the process lenders use to review the creditworthiness of a potential borrower. It’s a financial measure lenders use to determine the amount of risk involved in real estate investment. The underwriter will analyze the borrower’s financial standing and the property’s value to review the potential of the deal.

Since most real estate loans use the property as collateral, the underwriter will ensure the property value doesn’t exceed the loan amount. The underwriters will use the appraisal value of the property to evaluate the loan size.

Most banks have strict underwriting guidelines to ensure loan applicants meet a certain level of risk. This will include assessing the borrower’s credit history and performance on past loan obligations, income (self-employed income, investment income, etc.), the applicant’s repayment capacity, and so on.

While hard money lenders have their own underwriting standards, they are less strict compared to banks. They will focus on evaluating the strength of investment and the potential returns.

Opportunity for creative financing structures and solutions

Hard money loans offer loans tailored to your needs. They are more flexible and allow you to negotiate the repayment schedule and loan terms. Some even offer free underwriting or reduce fees for the underwriting process.

Hard money lenders also support lending money to purchase off-market properties, which aren’t always publicly advertised. Moreover, their payment structures are flexible and adjustable to meet an individual’s unique loan requests. This makes them a more favorable financial partner compared to a bank.

In Conclusion…

When it comes to real estate investing, you need the fastest, easiest, and most transparent method to obtain money. Hard money lenders are your go-to financial partners that are willing to listen to your financial needs and customize a loan that works best for you. You just need to find the right hard money lender.