hard money lenders loan approval versus the banks

A bank can take weeks between the time you apply for a loan to the time your loan is funded. This can pose a problem for real estate businesses who need a fast turnaround. Since each piece of real estate is unique, sellers can receive a number of competing offers. Being able to offer quick payment may make the difference between getting the property or losing out.

Hard money lenders, however, can approve and fund hard money loans in as little as seven to eight days. Here are five reasons hard money lenders act faster than banks:

Shorter Applications

Loan applications that private money lenders require to approve hard money loans are less extensive than those required by banks. Banks require a credit report, proof of income and assets, and employment verification. After receiving this information, the bank’s loan department reviews it to assess the risk associated with approving the loan. Even though home mortgage loans are secured by the mortgaged property, banks usually do not collect any information about the property itself. Rather, their assessment of risk is based on you, the borrower.

If you have bad credit or no credit history, or the documents establishing your assets are insufficient, a bank may decline your loan application. This is true even if the purchase is a guaranteed money-maker. For example, even if you apply to borrow $100,000 to buy a home that you can sell for $1 million dollars, the bank may still decline to approve a loan if it deems you to be a credit risk.

Hard money loans, on the other hand, only require the asset in question. This typically takes the form of the property you’re trying to fix up and sell. By relying on high-interest rates, these lenders are able to approve loans quickly and still make money back if the borrower doesn’t comply with their demands. While this is bad news for someone inexperienced, this is great for a savvy member of the real estate industry.

Loan to Value Ratio

Hard money lenders view loans as business opportunities. Because they obtain a lien against the property, hard money lenders care only about the investment, and not your credit history, assets, income, or employment.

To evaluate the investment, hard money lenders use loan to value (or LTV) ratio. The LTV ratio tells a hard money lender whether the loan is a good investment. In the example above, a $100,000 loan against a property worth $1 million gives an LTV ratio of 10%. Many private money lenders would jump at such an opportunity. This focus on the investment, rather than your personal history, is another reason hard money loans can be approved quicker than bank loans.

No Mortgage Regulations

You may wonder why private money lenders for residential owner-occupied properties are so difficult to find. You might also wonder why they restrict how the loan may be used. The primary reason is that private banks are not mortgage lenders.

Being a mortgage lender requires compliance with a number of state and federal mortgage laws and regulations. While these protections are intended to reduce abusive or misleading practices by mortgage lenders, they also slow the loan process and lead to rejection of loans, even ones that make good business sense. Since hard money loans are not mortgages, hard money lenders are not required to comply with mortgage laws and regulations. This means that they can move faster in reviewing, approving, and funding loans.

Different Relationships

Another reason hard money lenders move quicker than banks is that the relationship between you and your lender is different. Hard money loans have a short term and low LTV so both you and your hard money lender make money. If you have found a great business opportunity, the hard money lender is usually excited to be part of it.

Quick Funding

The main reason that hard money lenders act more quickly than banks is that hard money lenders fund loans quicker than banks. This is because banks treat their depositors’ money as if it were their own, rather than an asset to be loaned out to improve the community or build businesses. Instead, banks charge depositors for the privilege of handling their money and reject loan applications so none of it goes out as loans. This miserly reluctance make you wonder if bank executives are simply rolling around on piles of money rather than lending it out.

The speed with which hard money loans can be approved and funded can put your real estate business ahead of your competition. When you’re ready to embark on your next business opportunity, reach out to ARC Private Lending for more information today.