One of the biggest advantages of using a hard money loan is the speed at which loan approval and loan funding take place. In many cases the approval for the hard money loan can take place in just one day. The hard money lender is going to consider the property, the amount of down payment or equity the borrower will have in the property, the borrower’s experience (if applicable), the exit strategy for the property and make sure the borrower has some cash reserves in order to make the monthly loan payments. As long as everything seems reasonable in these areas approval will most likely be granted.
Real estate investors who haven’t previously used hard money will be amazed at how quickly hard money loans are funded compared to banks. Hard money loans can be funded with 3-5 days if needed. Compare that with 30+ days it takes for a bank to fund. This speedy funding has saved numerous real estate investors who have been in escrow only to have their original lender pull out or simply not deliver. This is a perfect situation for a hard money lender to step in, provide financing quickly and save the deal.
As discussed previously, hard money lenders have few requirements, especially when compared to bank loans. They include the borrower having sufficient equity in the property, enough cash on hand to make the monthly payments, a reasonable exit strategy and ample experience if needed. Fewer requirements means higher likelihood of loan approval. Banks have lengthy lists of requirements a borrower must meet in order to qualify for financing and are known for saying “No” more than “Yes”. Their list of requirements increases each year and many of them seem arbitrary.
Banks also have a list of issues that will raise a red flag and prevent them from even considering lending to a borrower such as recent foreclosures, short sales, loan modifications, and bankruptcies. Bad credit is another factor that will prevent a bank from lending to a borrower. Most banks will not lend to a borrower who already has 4 mortgages even if the borrower’s credit is perfect with no other issues.
Luckily for real estate investors who may currently have some of these issues on their record, hard money lenders are still able to lend to them. The hard money lenders can lend to borrowers with issues as long as the borrower has enough down payment or equity (at least 25-30%) in the property. This 25-30% equity is the security for the loan that ensures the borrower is going to make the agreed upon monthly payments and also make the balloon payment (usually via sale or refinance) at the end of the loan term.
In the case of a potential borrower who wants to purchase a primary residence with an owner-occupied hard money loan through a private mortgage lender, the borrower can initially purchase a property with hard money and then work to repair any issues or wait the necessary amount of time to clear the issues. Once the issues have been remedied, the borrower will be able to refinance to a lower cost loan with a conventional lender such as a bank or credit union.
Banks are also unwilling to provide home loans to borrowers who are self-employed or currently lack the required 2 years of employment history at their current position. The borrowers may be an ideal candidate for the loan in every other aspect, but these arbitrary requirements prevent banks from extending financing to the borrowers. A hard money lender would be able to provide a short term loan (1-3 years) to enable the borrower to purchase their property. In the case of the borrower without sufficient employment history, they would be able to refinance out of the hard money loan and into a lower cost conventional loan once they obtained the necessary 2 years at their current position.