When you’re looking to finance a real estate investment project there are a few ways to go about getting your funding: you can apply for conventional loans, hard money loans, and private loans. Each of these options has their own unique set of guidelines and regulations, and they’re all inherently different. For example, the application and approval process for a conventional loan versus a hard money loan is much different, whereas a private loan may not have any formal process other than knowing the “right people.”
What are the drawbacks of a conventional loan?
If you’re a first time borrower, or if this is your first real estate investment project, you may be inclined to work with a bank and secure a conventional loan to fund your project. However, working with banks can present many complications and the process can be very slow.
For starters, you generally need to go through the pre-approval process and then, once you’ve submitted an offer, a regular mortgage application process where the bank requests pretty much every single financial document you could possibly get access to including bank statements, credit card statements, and tax forms. They also want to know where your down payment is coming from, so if you have another investor or have had money gifted to you, you’ll need notarized documents to prove it. Banks also appraise each property they may be lending on, and often don’t look favorably on fix and flip properties since they may not appraise for the full value being requested until after the renovations have been completed. If you do make it through the hurdles that the bank presents, it can still take upwards of a month or more to close on the property - and in that time another investor may come through with quicker funding and sweep the deal right out from under your feet.
What are the benefits of a hard money loan?
That, of course, brings us to the benefits of securing a hard money loan rather than a conventional loan. Typically, hard money lenders have a much shorter application process than a conventional lender, and they evaluate each project on its merits. For example, a hard money lender will examine the borrower’s financial history, but more important factors will depend on their ability to offer a down payment as well as their plans for the individual project and the feasible viability of the project to turn a profit either throughout the duration of the loan or upon the completion of the project at the time of sale. They aren’t necessarily concerned with the present value of the property since they’re well aware that the borrower will be making improvements. Instead, their primary concern is to see that within a relatively short period of time they’ll make back their investment (plus, of course, interest).
However, one of the biggest benefits of securing a hard money loan is how quickly you can do so. Many hard money lenders are prepared to provide funding in as little as two weeks, with some - such as Walnut Street Finance - able to provide funding within three days of reviewing your proposal.
Interested in learning more benefits? Tell us about your upcoming project and we’ll tell you if you qualify!