Hard Money Lenders and Banks: 4 Key Differences To Know

January 30, 2024

Produced by:
Elizabeth Welgemoed

Elizabeth is a Senior Content Marketing Manager with over 10 years of experience in the field. Having authored or edited 1,000+ online articles, she is a prolific content producer with a focus on the real estate vertical.

Lending 101

For decades, loans have been helping real estate entrepreneurs overcome a multitude of challenges. Loans are a natural step for many in the real estate business, but finding the right loan for a development project can be a big challenge in itself. There are many loan options available to choose from, and entrepreneurs should carefully consider what is best for their project.

Hard money loans are one option, typically available as short-term loans backed by the value of the borrower’s real estate.The other is a real estate loan from a traditional bank.  Banks typically hold the property note until the borrower’s loan is repaid in full over longer terms. Before selecting one of these options, take a look at these four key differences to know when looking for a real estate loan:

Funding Fundamentals

The first fundamental difference between hard money lenders and banks is the source of the funds used to grant the loan. Hard money loans are funded by private investors, or by funds or other private lenders. Banks typically fund loans using a pool of capital set aside for high-risk loans, and that pool is usually small or non-existent, and varies depending on how much deposits the bank took in.

Hard money lenders may provide money sourced from individual investors, provide lines of credit, or make use of other types of investment funds to provide loans. By putting together loan funds from private, non-bank sources, hard money lenders can provide more flexibility when it comes to funding. On the other hand, banks lend only from a designated pool of funds overseen by set regulations. These strict lending guidelines cause banks to commonly deal only with lowest risk clients.

Ticking Timelines

The amount of time that goes into the loan application, underwriting and approval process can make or break any project. Due to flexible fund management and less supporting requirements, hard money lenders like New Silver are able to review, underwrite and grant full loans in a week or less. Traditional bank loans are lengthier processes, averaging 45 days to be fully underwritten and approved. This can be a significant disadvantage to real estate entrepreneurs working with strict deadlines in competitive markets.

Another important factor to recognize with bank loans is that they offer no certainty of a loan until the later stages of the underwriting process.

Credit Crisis

Finding a bank which does not make a decision based on the borrower’s credit and financial history can be a significant issue. Bank loans typically have strict rules and loan terms, meaning borrowers with less than perfect credit and financial records may struggle to get approved.

Hard money lenders put less stake in the borrower’s financial history, and more in the value of the asset being borrowed against. This allows borrowers with various levels of experience and financial backgrounds to become real estate entrepreneurs in their own right.

Banks are also often subject to regulations surrounding lending to small businesses and entrepreneurs, leading to more loan rejections. These regulations can evaluate how long the borrower has been in business, their debt, cash-flow needs and more.

Loan Terms and Loan-to-Value

There is also a distinct difference in the loan terms, loan-to-cost, and loan-to-value ratios offered by banks and hard money lenders. Banks typically set their loan terms to be dependent on the value of the real estate in question, with loan-to-value and loan-to-cost ratios ranging from 65% to 80%, resulting in a borrower having to come up with at least 20% of the purchase price upfront. Banks also do not typically provide any funding for construction costs, which means more out of pocket cash requirements from the borrower.

Hard money lenders differ, with each lender setting their own specific terms and conditions for LTC and LTV ratios. New Silver offers up to 100% loan-to-cost and construction budget financing.

In short, hard money lenders tend to stick to real estate investments which allow the biggest opportunity for borrowers to be able make a profit and repay their loan. Banks prefer to play it safe, dealing mainly with borrowers with secure incomes they can document, and strong credit history. Both types of loans have their advantages and disadvantages, and it’s up to the real estate entrepreneur to determine the best fit for their project.

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