My initial exposure to hard money was research on an article about a hard money lender who managed to arrange a loan for a real estate investor in a matter of days. I was shocked. My experience with banks and credit unions led me to believe that it took months to approve and fund real estate loans. I was wrong, at least where hard money is concerned.
I have applied for three mortgages in my lifetime. Each and every one of them took months to get from application to closing. So how do hard money lenders approve, underwrite, and fund real estate loans in a matter of days? It all boils down to lender structure.
Private Companies, Not Financial Institutions
Hard money lenders are structured as private companies. Take Salt Lake City, Utah’s Actium Partners. Actium is a licensed company that manages funds contributed by multiple investors looking to lend out their resources as hard money and bridge loans. In addition, the company specializes in commercial real estate loans.
Actium Partners and its hard money peers are not financial institutions. They are not licensed as banks or credit unions. Therefore, they are governed by a completely separate regulatory scheme. The regulations that govern what they do give them a lot more leeway. And with that leeway comes the ability to do things more quickly.
How Banks Approve Loans
Banks approve loans based on a borrower’s demonstrated ability to repay. A loan officer looks at the borrower’s application before beginning a thorough, no-stone-unturned investigation into every aspect of his financial life. That loan officer looks at:
- Income and savings.
- Other financial assets.
- Current debts.
- Debt-to-income ratio.
- Credit score and history.
A loan officer will look at every available detail in hopes of determining whether an applicant has a realistic means to repay what is borrowed. Such thorough investigations take time. It is not something a loan officer can do in a couple of hours.
How Hard Money Lenders Approve
Actium Partners explains that hard money lenders don’t do such thorough investigations. They don’t need to because they make approval decisions based on asset value. Let us say a borrower is looking for money to obtain a piece of commercial property. The lender is concerned only about how much that property is worth.
The property acts as collateral to back the loan. So if it has enough value to cover the loan and any associated expenses, a hard money lender is happy. The only other thing a lender will typically require to approve is a reasonable exit plan. Best of all, valuing the property is as simple as conducting an appraisal. That can be done in a day or two.
The Paperwork Difference
Another significant difference between banks and hard money lenders his documentation requirements. Banks have a habit of needing a ton of paperwork. Not only that, but it is also not unusual for loan officers to continue requesting new documents throughout the entire underwriting process. Every new document request only adds time.
Hard money lenders require very little paperwork. They need an application, an appraisal report, and information on the property itself. That’s it. They can review the documents in a couple of hours.
Hard money lenders can do in days what banks need months to complete. It’s not because they are better. It is simply because their approval and underwriting processes are so drastically different. They are different enough that Actium Partners has been known to approve and fund loans in as little as one business day. You will never get that kind of speed from a bank.