Why A Hard Money Loan Can Serve Your Needs Better as A Real Estate Investor
If you are looking for loans to finance your next real estate venture, there are many options you can choose from. Among these loan programs, however, Hard Money Loans and Traditional Bank Loans are often the go-to choices in such endeavors. In this article, we will be exploring these two loans. Knowing the principal differences between Hard Money and traditional bank loans can help you make an informed decision in financing your real estate project.
Key Differences Between Hard Money and Traditional Bank Loans
Hard Money Loans
Hard Money Lending is an asset-based or collateral-based loan program. Hard Money Lenders focus more on the valuation or after-repair valuation of the asset as well as its potential to generate profits. They accommodate borrowers who have non-stellar credit scores or financial histories. Hard Money Loans are known for the speedy release of funds and the unburdened flexibility of their underwriting or decision process.
Traditional Bank Loans
If you are considering applying for traditional loans, visit established commercial banks. But unlike hard money loans, they focus on the borrower’s credit history and financials rather than the asset they are funding. Their criteria are centered mainly on excellent credit scores and credit history requirements. Traditional loan processes adhere to nearly unyielding lending policies maintained by banks and regulations. Thus, loan applications require detailed information and documentation that prompt deeper reviews. Congruently, these also lengthen the undertaking or loan approval process without assurance of approval.
Choosing Between Hard Money and Traditional Bank Loans
Here are some factors you must consider before choosing the type of loan you will sign up for your project.
Turn Around Time to Fund Release
Fix-and-Flippers and other property investors need funds as soon as possible because they work against other investors in pursuing real estate deals. If you are one of them, hard money loans allow quick access to funds, which is an advantage when securing an investment property. The ability of hard money loans to fund urgent opportunities in real estate investments highlights one of the key differences between hard money and traditional bank loans. They can release loans within 15 days, while Traditional mortgage loans may take four weeks or months to give you the result.
Interest Rates
One aspect where traditional loans shine over hard money loans is the interest rates they offer. Lower interest rates are the strength of commercial loans. Hard Money Lenders, on the other hand, charge higher loan rates. The reason is that hard money lenders absorb more risks in granting loans. They have more lenient undertaking and risk assessment procedures. Traditional lenders, while charging low mortgage rates, are risk averse. Thus, they require high credit histories from borrowers. Also, they perform intensive reviews on borrower financials, which take time to finish.
Equity or Down Payment Requirements
Another aspect you would want to consider is the equity requirement on both types of loans. Traditional lenders require borrowers to shell out down payments between 3% to 20%, depending on their loan program. And if your down payment is less than 20%, part of the requirements is to secure mortgage insurance until your equity moves up to more than 20%.
For hard money loans, the lender can provide an LTV of 75% of the after-repair value of the property you want to invest in. Further, if you play your numbers right, you might even be able to get 100% financing for your project.
Borrower Profile and Credit History
Being asset-based, non-traditional lenders need a reason to lend you money for your project. Although they are not particular about stellar credit history, non-bank lenders prefer you present your investment plan. To convince your lender, it is best if you prepare a compelling hard money loan proposal that will increase your chances for funding. On the other hand, if you have a well-established and excellent credit history and score, traditional lenders may be what you need. These different loan approaches underscore the many differences between hard money and traditional loans.
Property Type and Purpose of Loan
Because of the speed in the release of funds, property investors prefer to deal with Hard Money Lenders when they have real estate projects. It helps them minimize the turn-around time in improving the property. After selling the property, they will pay off the loan, and any remaining funds will be the investor’s profit. Another scenario is if you invest in a rental, the faster you rehab your property, the quicker you can look for tenants.
Borrowers purchasing primary residences are the typical targets of traditional lenders. If you are a home buyer purchasing a primary residence, your bank will most likely have a home loan program for you.
Term of the Loan
Traditional banks offer 15 to 30-year fixed terms to their clients. They appeal to many mortgage clients because long terms mean lower monthly payments.
Hard Money Lenders specialize in short-term loans that range from 3 to 36 months. These loans are primarily for property rehab projects. You should include in your plans how to pay the principal at maturity.
Pros and Cons: Hard Money Loans and Traditional Bank Loans
Below is a comparison of the Pros and Cons of Hard Money and Traditional Loans. The table aims to help you decide on the type of loan that is best for your project.
Choosing Your Lending Champion
Choosing what loan program is best for you depends on your needs and the purpose of your real estate project. For example, if your real estate project is to turn a decrepit property into a profitable venture, a Hard Money Loan is a better option. Why? Because Hard Money Loans offer a quick release of funds to finish the house in the shortest time possible. However, if you have a high credit score and prefer long-term loans, choose traditional lending.
Making an Informed Decision
Understanding the key differences and considerations between the two loan programs helps you make an informed decision. Your choice should be about your project’s needs and purpose, not which of the two loan programs is better. Consider the pros and cons of each loan program.
Hence, for real estate investors who prefer to work fast and breathe new life into neglected properties, there is only one choice: Hard Money Loans. Let us help you start your real estate investment journey. Call us now at (832) 770-9415 or send us an email at info@gllholdings.com.
