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Hard Money vs. Traditional Lender Construction Loans

Posted by Walnut Street Finance Team on Apr 20, 2018

No matter how the real estate market fluctuates, one thing remains the same – real estate investors need money to fund their projects. As the lending landscape has changed over the years, it has become increasingly more difficult for developers to get the money they need through traditional lenders.

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That’s where private lending hard money loans come in.

Hard money construction loans are an important alternative for developers who need the funds to get their new construction project started but may not be a good fit for a loan from a traditional lender. Below, we’ll talk about the difference between hard money vs. traditional construction loans and how to decide which is right for you.

Hard Money vs. Traditional Lender Construction Loans

While conventional construction loans are issued by traditional lending institutions like banks, hard money loans are provided by investors or investment groups. Hard money construction loans are secured by the real estate being purchased and often charge higher interest rates than loans from a bank, but can close in a matter of days vs. traditional lenders that take more time. However, even developers with a strong financial background and access to traditional loans sometimes opt for hard money loans to fund their new construction projects.

When looking at hard money vs. traditional construction loans, it’s important to consider the following questions:

When do you need your money?

In the real estate construction industry, time is often an important factor when it comes to project success. Funding a loan quickly can often be the difference between taking advantage of a great deal or losing out on it completely. Though timelines vary when it comes to approving and funding a construction loan, hard money loans tend to be quicker.

While most hard money construction loans can be funded within a week, traditional lenders often take 30 days or more to get you the money you need. This doesn’t even include the application process, which can be quite lengthy with traditional lending institutions but is often completed in 1-2 days for most hard money loans.

How do you want your loan to be structured?

Loan structuring is another concern when it comes to choosing a construction loan type. Most traditional lenders take a one-size-fits-all approach to construction loans. Their terms are straightforward, but there is very little wiggle room when it comes to your specific loan requests. On the other hand, hard money lenders often provide more flexible loan repayment and collateral release terms.

Hard money lenders are not bound by a one-size-fits-all lending model. This means that they can structure the loan terms in ways that benefit both the lender and the borrower. In addition, they can also provide repayment schedules that are structured to meet the borrower's unique needs.

What type of loan do you qualify for?

When it comes down to it, approval is one of the most important factors when it comes to construction loans. There are many reasons why a builder might not get approved for a traditional construction loan. Even if your financial history is strong, the bank may still see something in your application that indicates you aren’t a good fit for a conventional loan, such as incomplete records or self-employed work.

Hard money lenders are able to take more than just the borrower or company’s financial history into account when evaluating loan applications. A hard money lender will look at your ability to repay the loan as well as how much equity you have invested in the property. This means that they can often fund projects that were not approved for a traditional bank loan.

Which Loan Type is Right for You?

When it comes to hard money vs. traditional lender construction loans, the right option for you will depend on a number of factors. If you have been turned down for a conventional loan, then hard money may be just the solution to helping you get your project funded. Similarly, if the less flexible loan structures offered by traditional lenders don’t work for you, then you may want to explore your hard money options.

For many builders, choosing the right type of loan comes down to their timeline. In this business, being able to quickly take advantage of deals and secure land or properties is important. While conventional loans are slower when it comes to approval and funding, hard money loans can be completed and funded quickly, allowing builders to jump on excellent opportunities.  

In the end, the right type of loan for you will depend on what your circumstances and priorities are. After weighing the pros and cons of each type of construction loan, consider which loan will give you the flexibility and terms you need to get your project off the ground.

 Which loan type is perfect for your project

Do you still have questions about hard money vs. traditional lender construction loans? Give us a call today: (703) 273-3500.

Walnut Street Finance Team

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