In a competitive housing market, speed, flexibility, and fundraising at the appropriate time are the basic factors that differentiate a successful real estate investor from the other. This means that to be successful in your real estate investment ventures, you have to work with a fast lending firm. To do this, we looked at and discuss some of the reasons why investors prefer hard money lending to conventional lenders to better help you understand why loans work the way they do.
Does Speed Matter When Buying A House?
Speed is one of the reasons why real estate investors prefer to apply for hard money loans. Applying for a loan using a private/hard money lender is very simple, straightforward, and transparent. Most times, taking a loan from a hard money lender only requires filling out a simple loan form and receiving an approval message immediately. This is not the practice of conventional lenders like the banks and credit unions, which require you to fill out a much more in-depth loan application and waiting at least a couple of days to receive a response.
Moreover, fund reimbursement from a hard money lender can be between two days and a week, depending on the familiarity with the lender. While receiving funds from a conventional lender can take up to a month or even more. When you have a simpler means of fast approval, it works in your favor as well as the money lender to work quickly and help secure your investment sooner rather than later.
What Is Asset-Based Lending?
Asset-based lending means the private money lenders are not as interested in your credit score, bank statement, income history and other requirements of the sort that the conventional lenders are interested in. While they may take them into account, they are only interested in working with investors that have equity or asset that is enough to pay their money if the investor defaults and is unable to pay. This means that when you plan to apply for a loan if you do not meet any of the conventional underwriting requirements, you don’t have to worry. All you have to do is apply for a hard money loan!
Guarantee of Capital
Another reason for using hard money is having the assurance of receiving funds after loan approval. There are cases where conventional lenders pull funds out of escrow because of small issues. However, an event of this type is extremely atypical with hard money lenders. Once your loan application is approved, there is an assurance of receiving funds.
Flexible Loan Requirements
The flexibility of the loan requirement is an important reason why investors prefer this type of loan. Unlike traditional lenders (banks and credit unions), the hard money lenders do not use the basic underwriting processes. The lenders evaluate each applicant individually and according to the use of the loan. So, depending on your loan, you can draw out a new term for your own individual need and base on what pays you most. An investor working with a hard money lender does not have to stick to any complex rules before receiving funds.
Loans with No Prepayment Penalties
When you take a loan from a conventional lender (either banks or credit union) and you pay off the loan before the end of the agreed term, you may be subjected to paying some penalties for doing so. However, this is not so for hard money lenders. If you decide to pay off your mortgage before the maturation date, you can do so without worrying about paying any fees for paying early.
Are Credit Score and Income History Important?
Another reason why most investors prefer hard money lenders is the less stringent rules involved. Borrowing from a traditional lender requires you to pass all the conventional underwriting processes before your loan is approved. This means that you should have a good credit score (700+) and a long-term stable income record. Whereas borrowing from a hard money lender does not require many of these rules. Your income stream and your credit score are less important. All you need to get your loan approved is collateral that can cover the cost of your loan if you are unable to repay.
Put the Investor Ahead of the Competition
Another important reason most investors prefer hard money to a conventional loan is the advantage they have over others in closing a deal. In a competitive market, speed is a critical thing that decides whether a deal will fail or not. Believe it or not, the speed of funding a deal is one of the things that draws the attention of a seller to a buyer. This means that investors that use the alternative or hard money lending approach have a greater chance of closing a deal than those that do not because of how quickly they can come to the closing table with their funds.