Do you think banks are always the best option when it comes to getting a loan? The answer could vary depending on the borrowers and their requirements. But if you are a real estate investor, you can’t depend on banks for loans as they have a long process, so you can look for hard money lenders.
They meet your requirements for flexible and fast funding based on different scenarios and opportunities.
In this article, you will understand the difference between traditional banks and hard money lenders and why investors always go for hard money loans than any other.
Understanding hard money lenders
Hard money loans are also known as bridge loans, which are short-term loans used by investors like house flippers or developers involved with the renovation of the property for selling purposes. These loans are provided by hard money lenders who are also a solution at the times you come across foreclosure.
These loans are generally funded by investor groups or private lenders instead of banks and use real property or equity as collateral.
Understanding traditional banks
Traditional banking generally refers to banks that have a physical presence and a domestic banking license. It typically has the following things:
- Physical presence
- Large employees
- Face-to-face customer service
- ATMs of their brand
- Regional headquarter
Banks vs. hard money lenders: Key differences
Hard money lenders provide investors with an alternative route of business financing that primarily focuses on property value and then the financial history of a borrower. They are generally private companies or individuals who have the ability to provide loans on a short-term basis more quickly than banks, which makes them a valuable choice for real estate investors.
Below are the key differences between traditional banks and hard money lenders in various domains:
Funding speed
- Banks: It generally takes more than 30 to 60 days, which can’t be a wait time for real estate investors to close a deal on an immediate basis.
- Hard money lenders: They provide loans on an immediate basis, which depends on the type of funding.
Relationship and networking opportunities
- Banks: They are usually transactional and don’t pay much attention or support to individuals.
- Hard money lenders: They focus on personalized advice, services, support, and introduction to professionals in different industries.
Flexibility
- Banks: They follow a very strict process of lending, like the rigid schedule of repayment, non-negotiable terms, and fixed product loans. These things can be challenging for investors when they need money.
- Hard money lenders: They provide investors with flexibility in repayment terms and loan structure to meet specific demands of real estate.
Prepayment options
- Banks: They often have penalties on prepayment, which makes the borrowers feel discouraged from repaying the loans early.
- Hard money lenders: They allow the borrowers to repay the loan early without signing any penalty, which is beneficial for the ones who want to take on other projects without any additional costs.
Approval process and documentation
- Banks: They ask for multiple documents that include income, employee verification, and tax returns.
- Hard money lenders: They focus on the asset value and potential of the project.
Hard money lending options for investors
Hard money loans are basically for a particular real estate type; some of them are explained below:
Fix-and-flip loans
Fix-and-flip loans cater to real estate investors aiming to purchase, renovate, and quickly resell properties for a profit. These loans typically cover both the purchase price and renovation costs, providing a comprehensive funding solution. Fix-and-flip loans can be closed in as little as three to five business days, offering speed and convenience. Loan approval is primarily determined by the property’s after-repair value (ARV), ensuring funding aligns with its potential market value.
Bridge loans
As the name suggests, these loans are for short-term business financing to bridge the gap between immediate fund requirements and a permanent solution.
DSCR loans
DSCR (Debt Service Coverage Ratio) loans focus on a property’s income-generating potential rather than the borrower’s financial profile. These loans are particularly well-suited for rental properties, where the property’s income serves as a reliable measure of the borrower’s ability to meet loan repayment obligations. A DSCR above 1.0 signifies that the property’s income comfortably exceeds its debt obligations, ensuring financial sustainability.
Ground-up construction loans
It helps with the loan for purchasing land and construction of new buildings. The funds, in this case, are released at every stage of the construction of the building.
Conclusion
Choosing between traditional banks and hard money lenders largely depends on the borrower’s specific needs and circumstances. For real estate investors, hard money lenders offer a compelling alternative with quick funding, flexible terms, and simplified approval processes.
These advantages make hard money loans ideal for time-sensitive opportunities like fix-and-flip projects, DSCR loans, bridge loans, and ground-up construction.
While banks provide stability and standardized products, hard money lenders deliver speed and adaptability, empowering investors to capitalize on market opportunities efficiently. Understanding these differences helps investors make informed decisions to achieve their real estate goals.
