It is with some amusement that I read so-called ‘expert’ advice on hard money lending from people whose opinions reveal that they don’t know what they are talking about. Just as an example, loan approval in the hard money industry is relatively easy compared to approvals in traditional lending. This reality is often presented in a negative light. But I can tell you this: easy approvals are not always a bad thing.
Understanding why hard money approvals are easier allows one to look at each loan on a case-by-case basis. While it is true that easy approval it’s probably not a good idea for someone who can’t really afford to borrow, hard money lenders are not that careless. They do not lend when the risk is too high.
On the other hand, easy approval is one of the things that makes hard money so attractive to certain types of borrowers – especially real estate investors.
Why Approvals Are Easy
It’s a mistake to assume that hard money approvals are easy only because lenders are willing to give out money to anyone who asks. That is truly not the case. According to Actium Partners out of Salt Lake City, Utah, approvals are easier in the hard money industry because hard money lending is based on asset value.
What does that mean? It means that hard money lenders do not have to turn over every stone and look around every corner to verify a borrower’s financial position and ability to repay. Instead, approval is based on whatever asset the borrower offers for collateral.
Given that the majority of hard money loans go to real estate investors looking to obtain new properties, the properties they are attempting to buy act as the collateral on the loans they apply for. As long as the property has enough value to cover the borrower’s risk, approval is generally given.
Why It Matters to Investors
Easy approval seems like a trap to people who do not utilize hard money on a regular basis. But to the real estate investor, there is no trap at all. And in fact, easy approval matters a great deal to pulling off their transactions. Consider the following two things:
1. Banks Don’t Like to Get Involved
As a general rule, banks don’t like to get involved in commercial real estate investments. It is very hard to convince a bank to fund property acquisitions. After the fact, once a bank can see that a new acquisition is generating revenue, refinancing with a traditional loan is back on the table. But initially, banks hesitate to fund new investments.
Hard money lenders have fewer reservations. They will step up to finance new acquisitions even when banks are overly cautious. That is a big deal to property investors.
2. Easy Approval Equals Fast Funding
Also know that easy approval leads to faster funding. Where a bank can take 30-60 days to thoroughly investigate a borrower’s financial position, a hard money lender can conduct a property appraisal anywhere from a couple of hours to a few days. Approval can be granted immediately thereafter.
For all intents and purposes, a hard money loan can be approved and funded in under a week. Actium Partners has been known to fund in as little as one business day. The speed alone is enough to attract most real estate investors.
Although critics look at easy approvals as a bad thing for hard money, it’s actually not. Both lenders and borrowers alike benefit from a more straightforward approval and underwriting process. That is why it works so well for so many.
