Why Choose a Hard Money Loan over a Conventional Loan

by | Dec 1, 2016 | Financing and Loans

If You Invest in Real Estate, You Know the Banking Struggle. Remember that time-sensitive property, the one brimming with profit potential? Remember the weeks wasted waiting for a bank’s decision, only to watch it snatched up by another buyer? Or how about the diamond-in-the-rough fixer-upper that the bank wouldn’t touch, leaving you frustrated and deal-less? That’s the infuriating reality of trying to secure traditional financing for investment properties. Banks, with their endless paperwork, credit score obsessions, and snail-like pace just aren’t built for the speed and risk tolerance our business demands.

But there IS a better way. That’s where the power of hard money lending comes in. Let’s break down exactly why banks make life difficult for investors, how hard money lenders are built differently, and get those questions you have about this strategy answered.

Why Hard Money Lenders Say “Yes” When Banks Say “No”

Problem #1: The Deal-Killing Time Crunch

The most lucrative real estate markets are competitive. When you find a promising property, you need to move quickly, or risk losing it to another buyer. Banks are notorious for lengthy approval processes, mountains of paperwork, and delays that can cause deals to fall through.

  • The Hard Money Solution: Speed is Your Superpower Think of hard money lenders as your pit crew in a high-stakes race. They understand that in hot markets, every second counts. When you find that gem of a property, they can often close the deal within mere days, not the weeks or months of agonizing limbo banks put you through. This speed means you can strike while the iron’s hot, snagging those time-critical opportunities that would leave you in the dust with traditional financing.
  • But What About Inspections? Don’t Get Reckless! Let’s be clear: speed doesn’t mean throwing caution to the wind. Even with a fast-approaching closing date, ALWAYS prioritize a thorough inspection. The key is to be strategic:
    • Inspector on Speed Dial: Build relationships with inspectors who specialize in quick turnarounds for investors.
    • Negotiate Smart: Work with the seller to get shorter contingency periods without sacrificing your right to back out if the inspection uncovers nightmares.

Problem #2: Banks Have a “Fixer-Upper” Phobia

Many potentially profitable investment properties need renovations to reach their full value. Banks often shy away from these projects, fearing they’ll end up lending more than the property is currently worth.

  • The Hard Money Solution: Focusing on Potential Hard money lenders focus on a property’s after-repair value (ARV). They understand the rehab process and the potential for increased value once renovations are complete. This allows you to unlock opportunities that traditional banks would pass on outright.
  • Understanding ARV: Hard money lenders assess ARV using a mix of tools. They’ll analyze recent sales of comparable renovated properties, consider appraisals, and factor in your experience and track record as an investor.

Problem #3: The Credit Score Obsession

Since the housing market crash, banks have tightened credit requirements dramatically. For investors who may have blemishes on their credit due to the risky nature of the business, or those simply building their credit history, this can be a significant hurdle.

  • The Hard Money Solution: Seeing the Bigger Picture While hard money lenders consider creditworthiness, they put more emphasis on the viability of the deal itself and your track record (if you have one).
  • What About REALLY Bad Credit? A less-than-stellar credit score doesn’t automatically disqualify you. Be prepared to offer a larger down payment to demonstrate your commitment, and clearly articulate your plan for project success and managing risk.

Problem #4: Banks are Risk-Averse (And That Hurts Investors)

Real estate investing carries inherent risks: unexpected repairs, market fluctuations, the occasional deal that goes sideways. Traditional banks tend to bail at the first sign of such risks.

  • The Hard Money Solution: Embracing the Investor Mindset Hard money lenders specialize in the real estate investment space. They have a deeper understanding of the risks involved and are equipped to manage them. This means they’re more likely to fund the types of projects that would make a conventional lender run for the hills.

Problem #5: The Application Nightmare

Applying for a traditional mortgage can make you feel like you’re drowning in paperwork. Banks demand endless documentation, tax returns, and a level of bureaucracy that can stall your projects for weeks.

  • The Hard Money Solution: Streamlined Process: Remember the never-ending pile of forms when applying for a traditional mortgage? Tax returns, bank statements, a seemingly endless quest to document your entire financial existence! It’s enough to give any investor a paperwork-induced migraine. Hard money lenders understand that this bureaucratic maze kills deals. That’s why their application process is refreshingly streamlined. Instead of demanding a full-scale audit of your life, they focus on what truly matters when underwriting an investment property. They zero in on the asset itself – its potential, the location, and the numbers that make the deal work. They want to see your renovation plans and understand your track record, demonstrating your ability to execute a profitable project. Of course, they’ll need the essential documentation for any loan, but it’s not an endless scavenger hunt for obscure paperwork. Think of it this way: banks want to dissect your entire financial history before considering the deal; hard money lenders want a clear blueprint of the project to make a swift decision. Their focus is on getting you the funds to make that deal happen, not wasting time proving you even deserve a chance.

So? How do I Find a Good Hard Money Lender?

It’s not about the lowest rate – think of it as hiring an essential team member. Seek referrals from successful investors, verify a lender’s experience, check online reviews, and be upfront about fees and terms.

The Advantage of a Hard Money Loan

As an alternative to conventional lending, many investors are using hard money lending.
A hard money lender allows you to close in days, rather than in weeks or months. Intrust can provide funding for closing within 48 hours typically. Furthermore, hard money lenders rely less on your credit status and more on the asset that you plan to purchase as the most significant factor for loan approval. Given their reliance on the asset as a component for loan approval and their familiarity with the real estate market, hard money lenders are more disposed to financing rehabilitation projects than conventional lenders. One reason is because hard money lenders like Intrust Funding underwrite investment properties based on expected ARV (after repair value) rather than current property value. As a result, neither credit score nor property condition are significant factors when investors apply for hard money loans.

Hard money lenders, as opposed to conventional lenders, designed their services with the real estate investor in mind. Although the reasons why hard money loans are superior to conventional loans are many, the few listed above are the major reason why hard money lenders are becoming the best way to fund real estate investment opportunities.

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