Hard Money vs. Conventional Bank Financing
You may have heard of a concept called hard money lending, and you may be wondering how it differs from conventional bank financing. Either type of financing is available for both commercial and residential real estate loans. The key differences are in three parameters:
The cost of hard money is generally higher than conventional financing. Hard money lenders offer loans at a higher interest rate and with more points due at closing. A hard money lender is generally taking a bigger risk and feels justified in making more money off the loan. In addition, the money loaned is typically personal money rather than institutional money, which means that the profit margin must be higher to make it worth the lender’s while.
The amount of time required to get a hard money loan is vastly shorter than the time it takes to get a conventional loan. This can be a huge advantage when a loan is being sought to avoid foreclosure or to close on a hot real estate deal that is only available for a short time. Some hard money lenders can close in as little as 24 – 48 hours. Conversely, most conventional bank closings can take up to 45 days for residential properties and even longer for commercial loans.
Another key advantage to hard money lending is that loans are available to people who may have less than perfect credit or have financial problems. Conventional loans are based on the creditworthiness of the borrower, as reflected in his credit bureau report and FICO credit score. Hard money loans are based solely on the equity standing in the property to be furnished. Hard money lenders are basing their loan terms off of the real estate collateral. For example, a Hard money lender is going to be more willing to make a $100,000 loan on a property worth $200,000 than he is to make a $180,000 loan on a property worth $200,000. Hard Money lenders base their loans off of the collateral in the property. They are more concerned about underwriting the loan based off the property being their asset than the borrower. As long as the property is full of equity, it is usually a safe loan for a lender.
Hard Money lenders will usually base their loans off of the value of the property and not necessarily the purchase price. If you are purchasing a property way under market value, you may want to consider a hard money loan in order to reduce or eliminate your down payment.
Some hard money lenders will even allow you to roll all of your acquisition costs, closing costs, construction costs and even mortgage interest payments into the loan in order to purchase a property with a true, no money down loan.
So, if you are buying a property that is selling far below its value or refinancing a property that is full of equity and need a loan in a hurry, it may be worth it to consider a hard money loan. You need to be aware that the cost of credit will be higher, both in points and in interest rate, but the cost may not be your primary concern. If you will be rehabbing the property and selling it, you will only have to pay the higher interest rate until the property is sold. Your profit margin should more than pay for the higher cost of the money you were able to borrow quickly without a high credit score.
Hard Money Bankers, LLC is a full service private real estate lender. They will fund short term hard money loans for non-owner occupied residential and commercial properties.
Jason Balin is a principal of Hard Money Bankers, LLC. His services include structuring, underwriting and managing creative real estate investment portfolios and hard money loans.