A hard money loan is often the best or only option for financing property where a property requires complete remodeling or the borrower has subpar credit. While these are often considered bridge loans to fill a financing gap, they often are for subprime rates, meaning you’ll pay more for the loan.
3 Advantages of Hard Money Lenders in New York
1. Property Value Not Creditworthiness
Hard money lenders use the property valuation to back the loan, not the creditworthiness of the borrower. This makes it easier for those with poor or no credit to obtain financing for a property.
The rate is higher than traditional loans so most borrowers consider this a short-term financing option. When credit and the home value is in a more suitable scenario, borrowers often seek to refinance under better terms.
Because the lender is looking at the value of the property, a distressed property may require a higher down payment. This is one caveat that can affect the ability of a borrower to obtain financing. Often 20 to 40 percent is required, based on the condition of the property.
This means that borrowers must show the ability to raise and obtain capital to qualify. While this isn’t defined by credit, it is a critical component.
2. Simplified Loan Process
Because it is a simplified process, many hard money loans close faster. This means the escrow process is shortened, making a hard money borrower very attractive to sellers looking to liquidate quickly.
The process can fund a loan in as little as three to five days compared to a lengthy bank process that can easily exceed thirty days. The lender is considering the property, it’s appraised value and the down payment of the borrower. Credit requirements are not necessary, expediting the process.
Hard money lenders also consider the experience of borrowers and the business plan of buying the property and how to get out of it, thus ensuring financing is repaid in a timely fashion. On top of the equity down payment, borrowers also prefer to see borrowers with extra liquidity and cash reserves. Once requirements are satisfied, the process is very fast. For experienced borrowers, fund approval may be received as quickly as 24 hours.
3. Willing to Consider Tough-to-Finance Projects
Hard money lenders are familiar with all sorts of investment projects. In other words, they have seen just about all scenarios and understand investment risk. Because of this experience, they are often the only financiers willing to consider tough-to-finance projects.
To ensure a hard money lender takes your project seriously, it is important to have a completely thought out business plan that includes the valuation of the property, including any appraisals if possible, current market trends and the plan to either flip the property or refinance.
Think of a hard money lender as a business investor reviewing the details of a new product launch. The product happens to be real estate in this case. But you can’t assume that the lender will just see the property and know its value. Yes, the lender will conduct due diligence independent of your data. But your proposal demonstrates your vision and professionalism. After all, you are the person saying you can turn this into profit. Show the lender how.
Remember that while a hard money lender will think outside of the normal investment property box, he still requires that the investment make sense. Connect the dots with construction or remodel estimates, timelines and potential buyers that are already lined up. Make it as easy as possible for the lender to say yes quickly. Follow through and you’ll have a lender willing to do more funding with you.