Have you ever considered taking hard money loans or conventional loans? Several scenarios could arise, and you’d need more cash than you have at hand. You can choose to reach out to acquaintances, family, or friends to loan you the amount with little to no interest. However, it is best to get a loan from a professional lender for certain property and business needs.
But how would you know if a hard money or conventional lender best suits your needs? Here is a comprehensive overview that provides valuable insights into the requirements, challenges, and benefits of both types of loans.
Overview of Hard Money Loans
A hard money loan is a short-term loan with high interest rates that you can secure using properties. It is also known as bridge loans, and it is good for individuals with bad credit but good assets. Most hard money lenders pay no mind to your credit score because they focus solely on the value of the property you use as collateral.
Hard money lenders are often investor groups, private companies, and individuals interested in real estate. There are no fixed requirements for hard money loans. Different lenders have different requirements and risk mitigation strategies.
Overall, hard money loans are faster to apply for and gain approval, but their repayment terms are shorter. Hard money loans are best for investors who are involved in fixing and flipping property or renovating properties to sell. If you want to avoid foreclosure, it is best to get a hard money loan because it is issued quickly.
Overview of Conventional Loans
Traditional financial institutions, mortgage lenders, and banks offer conventional loans. These banks and lenders offer low interest rates but have rigorous requirements. They are quite strict because the government does not offer these banks and institutions financial protection. So, if you default on your loan, the conventional lenders will sustain a loss.
This is why these lenders want to know your fixed sources of income, credit score, income-to-debt ratio, and more. Conventional lenders will profile you, and your loan will not get approved if you fall short of their expectations. If you qualify for a conventional loan, you will get a longer repayment term and low interest rates.
Challenges of working with a Conventional lender
Getting a conventional loan for your home mortgage will be best due to its interest rates. Here are some challenges you can encounter trying to apply and get approval for a conventional loan:
Borrower Qualifications
Conventional banks and other traditional financial institutions have limiting borrower qualifications. Some of these qualifications include:
Income History
Conventional lenders will ask you for your sources of income, bank statements, tax returns, and pay stubs. They request this information and documents to verify your income and determine if you can repay the loan. They will check your bank statements to gain valuable insights into your cash flow and ensure there are no fraudulent transactions. Conventional lenders may not approve your loan if you recently changed jobs or switched from a 9-5 to become an entrepreneur.
Down Payment
Lenders require you to make a minimum of 3-5% down payments. However, to be able to put less than 20% down, you will have to pay for private mortgage insurance (PMI). Also, your down payment must be seasoned funds, which is money that you allow to sit in any established account for 60 to 90 days.
The longer you keep the cash in your account before applying for the loan, the more likely you will get approval. Conventional lenders require seasoned funds to establish your creditworthiness and ensure you didn’t get the money through illegal means.
Credit Score
Most conventional lenders require a credit score of at least 620 and above. Conventional loans are not flexible regarding these requirements. You won’t qualify for the loan if you do not meet their minimum credit score bar. They will also check for negative events on your credit report, like missed payments. To get a conventional loan with better terms, you need a high credit score and good-standing credit reports, which are quite challenging to achieve.
Property Qualifications
You can apply for a conventional loan to refinance or purchase any type of property. It’s just that before your loan can get approved, the property has to meet strict qualifications during an appraisal. Some of these qualifications include:
Multiple Properties
If you are a real estate investor who has several properties in his portfolio, you have a low chance of getting approval for a conventional mortgage. Conventional lenders require that borrowers only have 10 financed properties. There are exemptions, such as securing financing with private lenders or refinancing your primary residence. Working with conventional lenders can affect expanding your property portfolio, as timing is essential in the industry.
Property Value and Condition
Conventional lenders always require an appraisal before they approve your real estate loan. The appraisal will give them valuable insights into the property’s conditions and value. With the information they garner, they can determine if the property is valued above or below the amount you have agreed to in your buy contract. If the property is valued below your buying price, conventional lenders will not approve the loan.
Speed
It will take you at least 30 days to close a loan with a conventional lender due to their strict requirements and guidelines. Depending on the loan type, it can take even longer. Conventional lenders should be your last bet if you need a quick commercial loan to finance a property. As a real estate investor, you need to act fast to secure the best and most profitable properties. Seeking a conventional loan can be fine for a personal mortgage, but it’s best to seek alternative finance options for your investment business.
Benefits of Choosing Hard Money Lenders
As a commercial real estate investor, you always search for alternative, affordable ways to finance your properties/projects. A beneficial option most investors who cannot qualify for traditional loans consider is a hard money loan. Why choose hard money loans?
Flexibility
Hard money lenders do not have rigorous loan requirements. Each lender has its own criteria, allowing you to opt for the one that best suits your financing needs. Private lenders are willing to create a customized loan package if you need a long repayment period, a low interest rate, or a large loan amount.
Borrower Qualifications
Most hard money lenders do not require full appraisals and high credit scores as they are asset-based. They do not care about your creditworthiness, they are mainly concerned with the value of your property. If your property or project has great value, hard money lenders will most likely approve the loan. Some lenders will just agree on a feasible exit strategy to pay your loan off before its maturity date.
Speed
When you work with a hard money lender, you can close deals in at least a week or less for some. Some hard money lenders specialize in real estate, so they understand the market and the need to speed up the loan process. Most will require basic personal and financial information and extensive details regarding the property as they are equity-focused.
Supports a Variety of Real Estate Projects
Hard money lenders support the financing of several types of property. If you’re a house flipper looking to buy distressed properties and sell them at a hefty property, hard money lenders are your best option. They are willing to provide you with a large loan amount that will cover the repair cost as long as the property has great potential. Whether you’re looking to purchase a rental property or a business owner looking to invest in commercial property, you can rely on hard money lenders for quick financing.
Get a Hard Money Loan at Capital Max
Capital Max is a firm that provides alternative financing for commercial real estate investment. We will help you secure a loan based on the equity of your property even when conventional lenders decline your application. At Capital Max, we provide comprehensive and transparent aid in real estate financing. If you need a quick commercial loan or are trying to avoid foreclosure, we are your best bet in this time of dire financial need. Reach out to us if you have any questions regarding our processes for securing a loan.