Hard Money vs. Traditional Loans: Understanding Which One Is Right for You

Many real estate investors like to take out hard money loans for financing rental properties, new construction projects, and to acquire fix-and-flips. The hard money financing offered by lenders gives borrowers more flexibility and allows them to close much faster. They don’t have this type of versatility if they apply for a traditional loan.

In most cases, traditional lending practices better meet the needs of people who are buying a home. In these cases, time is not as big of a factor. For instance, if you wish to buy a fix-and-flip house, you obviously need to make a quick purchase and find the best rate. This is especially true if you already have a buyer.

Loan Needs & Investment Payback

If you use hard money for a rental property, you can establish a good rate and increase your holdings by applying for a portfolio loan. This type of mortgage financing allows you to buy multiple properties without having to apply for separate loans.

Your choice of a hard money lender or traditional loan company or bank then is based on your loan needs and timeframe. Also a traditional bank considers your debt-to-income ratio while a hard money lender looks at the loan-to-value ratio when reviewing your application..

Therefore, a bank is mainly concerned about your creditworthiness to pay back the loan. By contrast, a hard money lender reviews the value of your investment for payback.  Instead of relying solely on your credit report, a hard money lender will ask for a property appraisal.

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Convenience Factor for New Projects

Using a hard money lending source for a construction loan is helpful when you don’t need a long term loan. In these cases, your delivery of the project is generally about a year so you don’t need a longer payback period.

Hard money lenders disburse  funds as they’re needed during a project. This enables you to fund your project using only the money you need to realize specific milestones.

Creative Ability in Real Estate

When you compare hard money lending and traditional loan practices, you will find that hard money loans offer you the ability to be rather creative when it comes to financing real estate. You can also apply for extensions if you like. For example, some investors may finance new construction for one year at an interest rate of 8%.

If the borrower wants to buy rental properties, he or she may apply for a portfolio loan to cover several investments. By using the services of a hard money lender, a borrower can apply for a light-doc loan without proof of income.

Average Processing Times

Hard money loans are approved more quickly than traditional mortgages and the money is available faster as well. It takes about ten business days to process a hard money loan and the funds are usually issued 48 hours after closing.

If you apply for a traditional loan, you usually will wait about 30 days for the loan to be processed. You will need more documents to process a traditional loan and a credit score of at least 685 to get a fairly decent rate.

Choose Hard Money Lending to Increase Your Real Estate Portfolio

A hard money loan and traditional loan each has its advantages. If you are investing in real estate, it usually is better to use a hard money lender to support your financing needs.

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