Hard money loans and Conventional loans are both used to finance real estate purchases and investments, though the differences are substantial enough that a savvy developer must consider both options carefully. Traditional financial institutions are often risk-averse, which can make the process of securing a loan for a speculative investment property difficult. Private money lenders offer more flexibility, allowing borrowers to begin their process of building or renovating with less hassle.
Hard Money Loan Differences
Before signing on any dotted line, it is important to understand the differences between hard money loans and Conventional loans. These variations have the ability to alter the timeline, scope, and execution of a project. Ultimately, the type of loan someone chooses could determine the success of the undertaking. Understanding the nuances of each loan allows borrowers to make smart fiscal choices as they navigate the world of Maine real estate.
Speed of the Loan
In the current market, properties are sold almost as soon as they are listed. When an individual is looking to purchase a speculative investment property, it is not feasible to wait a month while a bank processes reams of documentation and deliberates. For ambitious projects, a bank may spend more than thirty days working through income records, credit scores, and other details before informing the potential borrower the loan is denied. By that point, the property might be long gone.
A private money lender approving a Hard Money loan is not going to be hassled by red tape. This means that the borrower is going to get the funds needed to begin the project much faster, often within a week. The shorter span of time between request and the acquisition of the capital makes a Hard Money loan ideal for situations where time is of the essence due to the limited construction season or the breakneck speed of the real estate market.
Requirements for the Loan
Conventional lenders do not loan money without assurance that the borrower will be able to pay it back with interest. They utilize various means to do this, including credit scores, yearly income, and analyzing the potential borrower’s loan history. Banks are not likely to lend money to anyone who cannot prove two years of stable employment or someone who is already paying mortgages on multiple properties. There are many reasons that these constraints make it difficult for individuals to access the funds to acquire a speculative investment property.
A Hard Money lender does not weigh credit score, income, and the prior debt to the same degree banks do, a key difference between getting Hard Money and Conventional loans. Instead, Hard Money lenders tend to require a higher down payment and focus on the value of the assets that are being purchased. This offers security to the lender as it shows the borrower’s commitment to the project, with the hard assets serving as collateral. This allows the private money lender to loan to people who would not necessarily meet the stringent requirements to secure a Conventional loan. If the property is a solid investment and the borrower has an executable plan to turn a profit, the lender is not as concerned by the other metrics.
Length of the Loan
Another one of the differences between Hard Money and Conventional loans is the length of time the borrower is allotted to pay off the loan. Traditional mortgages have long repayment plans. These loans tend to come with lower interest rates, as the Conventional lender is confident they will earn enough in interest over the extended time to profit. These lower interest rates also mean that conventional lenders tend not to loan money for speculative investment property purchases, so individuals who hope to refurbish and sell houses or develop rental units can find it difficult to secure funding from these institutions.
Hard Money loans from private lenders are of short duration, usually between one and three years. These loan terms suit situations for house flips or commercial developments, where the borrower intends to place the property back on the market in short order. A borrower can gain access to the capital to complete the project expediently, turning a speculative investment into profit rapidly and repaying the loan well within the negotiated time span. There are also shorter bridge loans that allow borrowers to acquire funds while other fiscal logistics are sorted, such as when purchasing a new house while the old one is still on the market.
Making a Choice
Purchasing a speculative investment property is something that needs to be considered carefully to ensure that the project returns a decent profit. How the capital is secured to pay for the real estate and fund the necessary renovations is a key part of the equation. Conventional loans may offer lower interest and smaller down payment, but they also require more time to process and are administered by institutions that tender to be risk-averse, which can make it difficult for people to get approval. Hard Money Loans offer more flexibility, and private money lenders are willing to invest in bold projects as they have the assurance of a higher down payment and collateral.
Generally, Conventional loans are for individuals that are going to be living on the property they are purchasing, and Hard Money loans tend to be acquired for renovating rentals, flipping houses, or upgrading commercial properties. Hard Money loans promptly provide the borrower access to funds, skipping the lengthy approval process of a conventional lending institution. Understanding the differences between Hard Money Loans and Conventional Loans will empower borrowers to make the right choice for their speculative property investments in Maine and beyond.
In this quickly-moving real estate market, hard money loans can provide the flexibility needed to make profitable property investments. Contact Bridgepoint Capital today at 207-281-3842 to start a discussion about your project and how we can help.