When most people think about applying for a real estate loan, they immediately think about reaching out to the banks and credit unions that initially come to mind. This may include some of the largest and most well-known financial institutions in the country, a few regional banks and perhaps some local credit unions. To save time and energy shopping around for a new loan, these individuals may sometimes use the services of a mortgage broker. However, these well-known financial institutions are not the only real estate lending option available. There are times when it makes more sense to reach out to a hard money lender for assistance with your real estate financing needs.
You may have heard the term “hard money” before, but you may not be certain what it means or how it pertains to you. Bank lenders and hard money lenders may be used to fund the same types of properties, but they typically do not compete with each other head-to-head. This is because they appeal to applicants in different ways. With a closer look at how these two types of lenders are different, you can better determine when you should reach out to a hard money lender for a real estate loan.
How Bank Lenders Work
You may have previous experience applying for a real estate loan through a bank lender. Regardless of whether you apply for a loan with a larger or smaller bank, you will generally find that the lenders can quote you at least rough loan terms over the phone. When you complete a loan application and formally apply, you will learn if you qualify for their loan program. Their loan programs for residential, commercial and even construction scenarios usually have very specific criteria that you need to meet. This may include a debt-to-income ratio, a loan amount and LTV, a minimum credit score requirement, a minimum cash reserve after closing and more. There are also usually property requirements. For example, in most cases, an existing property must be in good condition with minimal or no significant deferred maintenance. If your loan request does not meet these and other requirements, the lender will decline your application regardless of mitigating circumstances in most cases. Essentially, either you meet all of the loan requirements or the financing request is declined.
What to Expect From a Hard Money Lender
A hard money lender, on the other hand, will not typically quote terms over the phone or via email without learning more about the loan scenario. Rather than trying to find loan requests that fit into a predetermined box of lending requirements, hard money lenders consider the attributes of each loan request to determine if the loan request has merits. Mitigating circumstances are considered. Properties funded with hard money typically are not already in good condition. Hard money loans are commonly used to renovate or rehab a rundown property so that it can later be sold or used as an income-producing property. There are not specific borrower credit score requirements, debt-to-income requirements or other requirements for the loan request, but the loan request must still be strong or have incredible potential. The loan terms are determined based on the lender’s perception of risk. Because these loans typically fall outside the typical lending parameters, hard money loans have a shorter term and a higher interest rate than bank loans. In addition, while bank loans may take two to three months to close in many cases, a hard money loan may take a few weeks or less.
Pulling It All Together
Essentially, many loan applicants will first look at traditional banks as a source of financing. This is because bank loan terms are usually more competitive. Hard money loans are often only considered when a bank loan is not possible or ideal. For example, a loan request may not qualify for a bank loan, or the loan may need to close faster than what is reasonable for a bank loan. As you can see, bank loans rarely are in direct competition with hard money loans. Because most major financial institutions have significant lending requirements, you can usually quickly determine if your loan request is feasible for bank financing by making a few phone calls. Be up-front about all aspects of your loan request so that you can get honest and accurate information from bank reps. If you determine that bank financing is not ideal, turn to hard money lenders as an alternative.
Hard money loans are not suitable for all loan requests, but they are critical instances when a hard money loan is the only or the best financing option available. Now that you understand more about the differences between hard money and bank loans, you can more easily make an educated decision about which type of financing to pursue.