Hard money lending is a traditional form of financing popular among real estate investors, business owners, and entrepreneurs. It is sometimes referred to as a lending tool of last resort even though such assumptions are completely inaccurate. For many borrowers, it’s the first and best lending option.
Hard money lending is characterized by some distinct hallmarks that make it easily distinguishable from traditional lending. Do you know what those hallmarks are?
Asset-Based Lending
The first hallmark of hard money lending is that it is asset-based. Salt Lake City’s Actium Partners says the best way to understand this principle is to consider a real estate investor. Let us say that this investor wants to buy a commercial office building.
The lender’s decision will be based primarily on the value of the property. The investor’s credit history and score, current income, and other factors normally considered by banks will not be part of the approval process for hard money. A hard money lender looks primarily at the strength of the asset itself.
Fewer Requirements
Because hard money is asset-based, borrowers face fewer requirements for approval. Traditional lenders approve loans based on a variety of factors that all add up to a measurement of the borrower’s ability to repay. And because of that, there are more requirements the borrower must meet. Not so with hard money. Borrower requirements are demonstrably fewer because of the asset involved.
Limited Paperwork
Fewer requirements and the asset basis of hard money lead directly to the third hallmark: limited paperwork. Borrowing from a hard money lender doesn’t require reams and reams of paperwork covering everything from profit and loss statements to monthly balance sheets.
Shorter Loan Terms
The next hallmark of hard money lending surprises a lot of first-time borrowers. What is it? It is the shorter loan terms hard money is known for. Actium says it is not impossible for a hard money loan to exceed two years, but that’s rare. Lenders prefer to keep their loans at 24 months or less. A typical hard money term is actually between 6 and 12 months.
Traditional lending tends to embrace much longer terms. Small business loans start around the 5-year range and go up from there. Commercial mortgages can be just as long as their residential counterparts.
Faster Approval and Funding
The final hallmark of hard money lending is speed. It is not unusual for a borrower to contact a hard money lender with a proposal and have a decision within 24 to 48 hours. A few days after that, an approved loan can be funded by way of an electronic transaction.
The speed at which hard money lenders work tends to depend heavily on their ability to appraise assets. Going back to the previous example of the investor looking to buy the commercial office building, his lender would have to appraise the property before a decision could be made. If the appraiser could get there the same day, approval could be given before the close of business.
Traditional lenders just cannot work that fast. Their multi-layered approval process can take a week or more. Then the loan needs to go through several more layers to get underwriting done. It is a long and complicated process that can take months.
Despite what you may have heard, hard money lending is not just for borrowers currently out of options. It is an option of the first resort among a specific group of borrowers who understand how it differs from traditional lending. Needless to say, its five hallmarks speak to its usefulness as a funding tool.
