How often have you tried to borrow money only to be confused by the process? Confusion isn’t abnormal in financial services. Perhaps that’s why real estate investors, entrepreneurs, and other business-types appreciate hard money so much. Hard money loans are known for their simplicity.
To say that simplicity is yet another advantage of hard money is to state the obvious. The best way to describe a typical hard money scenario is to say that it is no-frills lending. It is about as basic as lending gets. A person who cannot understand the hard money concept has no shot of understanding conventional lending.
Hard Money Lending Is Private
The first thing to know about hard money lending is that it is private lending. Where banks loan out money provided by way of customer deposits, private lenders lend money from investment funds they manage. In some cases, fund managers and investors are one in the same. In other cases, fund managers are third-party entities managing funds on behalf of investors.
Hard Money Lending Is Asset-Based
Another thing to know about hard money is that it is asset-based. What does this mean? It means that approval decisions are made based on the borrower’s assets rather than income, credit score, etc. Actium Partners out of Salt Lake City, UT explains it well enough.
According to Actium, the vast majority of their loans go to real estate investors looking to acquire commercial properties. As a hard money lender, they do not care about borrower income or debt load. They are not concerned with credit scores or bank statements. What they care about is the value of the property being acquired. Why? Because it provides security for the loan.
Actium’s strategy is to determine the value of the property in relation to the amount being requested. As long as it is worth at least as much as the amount of the loan in question, approval is likely. If it is worth more, then even better.
Application, Appraisal, and Funding
Getting a hard money loan revolves around a simple three-step process. Not only that, but the process can also typically be completed in a matter of days. You will never get that kind of speed from a conventional lender. Most banks and credit unions require several months to close on real estate loans.
As for hard money lenders, here are the three steps:
Step #1: Accept the Application
The first step is to accept the borrower’s application. An experienced borrower knows enough to submit required paperwork at the same time. As soon as all the paperwork is received, it can be reviewed and verified. This usually takes no more than a few hours simply because so few documents are involved.
Step #2: Appraise the Property
While underwriters are reviewing and verifying documents, an appraiser can be sent to take a look at the property. Whether a hard money lender uses his own appraiser or contracts with a local provider, appraisals can usually be taken care of in a day or so. Same day appraisals are not unheard-of either.
Step #3: Fund the Loan
Provided the paperwork passes muster and the appraisal shows a high enough value, approval is given right away. The only remaining step is to actually fund the loan. Thanks to the internet and digital technologies, this can be handled extremely quickly as well. Both funding and loan documents can be forwarded to a title company instantly.
If nothing else, hard money is simple. It is so simple that many first-time borrowers are blown away by it. Simplicity is one of hard money’s biggest advantages over conventional funding.