In the real estate markets today, traditional lending options do not always meet the needs of the investor. In such scenarios hard money loans come into play. Also known as private money lending, a hard money loan is secured by real estate as collateral.  The main underwriting guideline is the loan to value ratio.

Hard money loans are typically issued by a single investor or a group of investors who make loans secured by real estate. Although the rates are higher on hard money loans, the advantages can make the rates worth it. Investors and developers with access to bank credit and strong financial statements often opt for hard money loans for a number of reasons.

Difference between traditional loans and hard money loans:

• Speed

The first and foremost difference between conventional funding and hard money loans is the speed of loan approval. The ability of the lender to fund quickly makes all the difference between winning and losing a deal. The deal can become even more challenging when you are trying to secure a property that has other competing bids. Hard money loans help you with quick closing and hence set your offer apart from other buyers with conventional funding. That can make a hard money loan a true winner here. Most deals get finalized and funded in a matter of days or weeks. On the other hand, traditional loans may take 45 days or longer to close. In some cases private lenders can even process your loan in one to two days.

• Structure

Hard money loan terms can be structured by private lenders in such a manner that it is beneficial for the lender as well as the borrower. Banks and credit unions are not flexible and take one-size-fits-all approach to all loan requests. For example, most banks have debt coverage ratio qualifications. On a property where rent has been reduced, or vacancy is low, that can mean a denial. On the contrary, hard money lenders structure loans based on a percentage of the purchase price or loan to value (LTV) based on market value for refinances. Typically there are no debt service coverage requirements.

• Approval

Often conventional loans get rejected due to past credit issues, foreclosures or short sales. Even in some cases while your financial history is excellent, banks can reject your loan request. This is especially true if the income on the subject property is not perfect. On the other hand, hard money lenders do not take these issues into consideration as long as the borrower has enough equity in the property.

In todays market is is more important than ever to have reliable funding.  With commercial properties feeling the pressure from missed rent payments, banks are likely to start re-evaluating existing loans.  Hard money loans are a good option for commercial property owners who find themselves in a position where the property does not meet bank debt service guidelines.  Due to the nature of hard money loans, the main underwriting criteria is the value of the property.  So commercial properties with vacancies can be financed through alternative means when the banks decline to move forward due to DSCR issues.