Why Get a Hard Money Loan?
Get funds, quick!
Getting a loan through a public institution can take several weeks or even months to process, while a hard money loan can be obtained in a much shorter period of time.
Bad credit history, a history of bankruptcy, or a recent foreclosure
For a conventional lender, your credit history is a measure of your loan worthiness. If you have a record of bankruptcy, foreclosure, or simply have a poor credit rating, chances are you will not be able to get a loan from a bank.
Under the right circumstances, hard money lenders can provide real estate investors with a loan even if they have a poor credit history. Why? Because the property acts as collateral. And a down payment from the borrower helps offset the risk to the lender.
The borrower is part of an entity such as an LLC, trust, corporation or non-profit.
Banks give preference to individual borrowers who can personally guarantee the loan. If you are seeking a loan as part of an LLC, trust, corporation or non-profit organization it can be very difficult to get a loan through a traditional lender. Hard money lenders on the other hand frequently loan to entities, as they do not view them to be a financial risk in the same way traditional lenders do.
This not only means you can get the loan you need, but it also offers up certain tax and asset protection advantages for some borrowers.
Self-employed or short-term employment history
Conventional lenders prefer to not work with borrowers who are self-employed or have been employed for less than 2 years in the same line of business. This is a big problem for real estate investors who are generally self-employed, don’t get a regular paycheck, and are unable to provide documented proof of a stable income.
Self-employed investors also face additional problems when it comes to applying for a traditional bank loan. Conventional lenders require the borrower have a county or state license and be able to show 3 years’ worth of business tax returns that indicate a consistent increase in sales and stability or decline in expenses – something that is very difficult for an investor to provide.
Hard money lenders are not focused on the borrower’s employment status, proof of income, or whether or not they have licenses. Rather, their focus is on the collateral that can be offered for the loan.
Skip the hassle of gathering paperwork and the lengthy qualification process
A conventional lender requires a number of items during the application process that may include:
Business and personal tax returns for the past 3 years
Detailed proof of profit and loss
Rent rolls for the property serving as collateral
Cash flow statement
A hard money lender is only interested in the collateral itself, not your business records. This makes the application process much more straightforward, with much faster results.
Too many investment properties (more than 4 rule)
Conventional lenders abide by an arbitrary rule – no more than 4 loans per an investor. Banks are adamant about this practice despite there being no fundamental reason why they should object to a 5th loan.
Hard money lenders on the other hand are only focused on helping borrowers with their investment goals and are more concerned with the investors’ ability to service the debt payment and the underlying collateral.
Uninhabitable investment property
A property can have any number of concerns that can cause it to be uninhabitable, from electrical and plumbing problems to structural issues. A bank will not provide a loan if the property is uninhabitable, but a hard money lender understands the property’s value will be rectified once the property is rehabilitated and habitable.
Equity needs to be taken from one property to invest in anther property
Using the equity of a property to invest in a different property is a common strategy used by real estate investors. Hard money lenders offer what is called cash out refinancing that allow investors to quickly capitalize on new real estate investments without waiting for a property to be sold.
Hard money lenders can help investors who may be facing foreclosure due to missed mortgage payments on investment properties. This buys the borrower time to sell the property or refinance.
Declined by a traditional lender
Hard money lenders are not nearly as stringent as banks when it comes to approving loans. If you have received a declined application from a traditional lender, a hard money lender can help.
Additional examples of why a traditional lender may decline an application include, but are not limited to, the borrower:
Needing funds to finish a rehab project after their available funds have been exhausted.
Currently having the property on the market or the property has been for sale on the market in the past 6 months.
Intending to pay off the loan within 6 months or less.
Having an investment that is an apartment building or commercial property with an occupancy rate below bank underwriting standards or a significant deferred maintenance issue.