In general, obtaining financing for an investment property can be difficult. Since conventional loans can be hard to obtain, many investors are utilizing hard money lending. But this begs the question, why don’t banks lend to investors?
The Conventional Loan Conundrums
Timeframe of Closing
The key to acquiring investment deals in competitive marketplaces like Seattle is the ability to close quickly. Banks are typically unable to provide financing in short time frames, causing investors to miss out on potential investment properties. Banks also require additional documentation and information regarding the status of the property that may not be accessible at the time of purchase.
Property Condition
If your property is undergoing more than a few cosmetic repairs, traditional lenders are reluctant to supply funds. Often this is because of the risk of acquiring an asset in serious disrepair due to an investor’s inability to perform value-add renovations. Banks have become more cautious because historically their real estate mortgages have turned toxic; meaning the mortgage underwriting the property is valued higher than the property itself. For example, if you request a loan to buy a house worth $200,000, but you will need an additional $50,000 for repairs, your lender will not approve the $250,000 loan because the property is not currently valued that high. Additionally, many banks require the home to be in livable condition regardless of its status as an investment property.
Credit Standards
Credit requirements are much tighter than they were before the bubble burst. Factors including credit scores, payment history, and length of established credit affect your ability to acquire a conventional loan in today’s market.
Risk
It is well-known that investing in real estate is risky. Not only are investment properties often in need of significant renovations, but, with the market tightening, many homes are purchased without an inspection contingency on the offer. Even just a few unforeseen circumstances in a project can alter the construction budget and skew projected profits. For this reason, conventional lenders prefer to finance new construction projects rather than rehabilitation projects.
Application
Banks must be compliant with the Federal Deposit Insurance Corporation (FDIC), requiring borrowers to provide an extensive amount of information prior to obtaining a loan. Some of the information required includes but is not limited to tax return documents from the past three years, business financials, personal financials, and credit checks.
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.
