Hard Money Lending Vs Conventional Financing

Most Spokane real estate investors don’t start off with a lot of cash that can be used for purchasing properties. And even if you have money, leveraging loans from a lender will most likely work to your advantage as opposed to tying up all your cash in an investment.

When it comes down to it, you can choose between a number of lending options such as private lenders (also called hard money lenders), or conventional financing (mortgage companies and banks).

One of the things that confuses a lot of real estate investors is understanding what these terms really mean. In this blog, we’ll go over the basics of each financing option so that you can choose the one that best suits your situation.

What is private money (aka hard money) lending?

Private money loans, also known as hard money loans, are short-term loans secured by real estate. These are funded either by private investors or a fund from a group of investors. They have terms of usually 12 months, but that can be extended to 2-5 years, depending on the lender. Private money lending requires monthly payments of:

  • Interest only
  • Interest plus some principal: at the end of the term, you’ll also pay a balloon payment (a lump sum payment due at the end of a balloon loan, such as a private money loan)

You’re probably wondering how much money these lenders can actually lend to the borrowers; that amount is primarily based on the subject property’s value. The property can be one that the borrower is acquiring or that they already own and want to use as collateral.

Contrary to what some may believe, the private money lenders’ main concern isn’t usually the borrower’s credit, but rather the concern typically lies with the property’s value. Don’t get us wrong: credit is still important, but it’s not weighted as much in this case as people think. Borrowers who’ve gone through a recent short sale or foreclosure and can’t obtain conventional financing can still get a hard money loan if the property that’s being used as collateral has enough equity.

What is conventional financing?

Conventional lenders, such as banks and mortgage companies, aren’t very popular among investors. However, there are some situations where this type of loan can be a good choice.

A benefit of conventional financing is that banks and mortgage companies offer low interest rates. Nevertheless, keep in mind that these rates are higher for investors compared to owner-occupants.

A potential downside is that conventional lenders are, in most cases, much slower at approving you for a mortgage. Real estate investors don’t usually have time to waste and the conventional lenders’ lengthy process could seriously lower your chances to score a great deal on a property.

Moreover, they’re not really flexible. If you don’t have a great credit score or an income that fits the lender’s exact guidelines, odds are that you won’t be getting a mortgage from a traditional lender. Furthermore, these institutions have a maximum number of loans that real estate investors are allowed.

The ever-improving rep of hard money lending

The reality is that the first thing that comes into many people’s minds when hearing “hard money lending” is a shady-looking lender who charges sky-high interest rates. In the past there were, indeed, a few bad apples that tarnished the industry: some greedy lenders who were attempting to “loan-to-own” offered super risky loans to borrowers with the intention to foreclose on the properties and using the real estate as collateral.

Fortunately, nowadays, these types of predatory hard money lenders don’t exist anymore. However, there’s some residual stigma left, generally when investors haven’t recently used the services of a trustworthy private money lender.

Types of properties and deals private money lenders are good for

In short, an investor in Spokane can obtain a private money loan on almost any type of property (depending on the lender’s particular offerings): residential, commercial, multifamily, industrial, land, construction loans and so on. Nevertheless, when we’re talking about deals, private money loans can be perfect for situations like:

  • Fix and flips
  • Single-family residential investment properties
  • Purchase, refinance, cash-out, or rehab of non-owner occupied investment properties

Why real estate investors use private money lending

Hard money loans are funded much faster than conventional loans — in some cases as quickly as one week. Conventional financing takes 30 to 45 days, whereas for a private money loan, the application process is fast (even online) and sometimes the loan can be approved on the very same day. You won’t hear back from a bank or mortgage company within the same week. Therefore, private money loans are a great source of financing when borrowers want the loan in a timely manner. Obtaining funding at a fast rate is essential for a lot of investors, especially when they’re trying to purchase a property with several competing bids.

Another important advantage for Spokane investors to finance their deal by teaming up with a hard money lender is the ability to access cash without tying up their assets — which means they can leverage their capital and better maximize their profits. For investors who are looking to buy a property for rental income, there are rental loan programs available so that investors can still benefit from private money lending while also receiving a longer-term loan. The rental income you’ll get from your tenants could considerably exceed your loan payment, which will increase your cash flow.

Although the interest rate of such short-term bridge loans will be higher compared to conventional loans, private lenders do not have the same regulatory constraints as compared to conventional lenders. Private lenders such as Civic Financial Services lend on stated income – thus not requiring the traditional W-2 or income verification as conventional lenders require for qualification. So for investors who have an unorthodox income, this is a major plus.

Private lenders have a key role in the real estate investment community, not only by bringing several benefits to investors, but also to the local economic landscape. For example, the jobs created by hiring construction and renovation experts help the neighborhoods and towns improve, which is great for the local economy.

When you’re ready to finance, CIVIC is here

Civic Financial Services is a private money lender that provides flexibility and fast access to short-term capital based on borrower experience, a deal’s merits, and the exit strategy. CIVIC generally doesn’t use a “one-size-fits-all” approach and instead analyzes deals on a case-by-case basis. This fills a void from the banks, as it’s a quick, customizable, and an easily accessible option.

The interest rates you can expect with CIVIC are:

  • 7.99% – 10.5% for bridge loans
  • From 5.75%+ for rental loans

The loan-to-value (LTV) ratios can be from 75-80%, depending on the property location and condition. Furthermore, all of CIVIC’s operations are done in-house, under one roof, which makes the lending process faster, smoother, and more controlled.

Given CIVIC’s flexibility for real estate investors, we strive to be great partners in fulfilling your investment goals. Give us a call at 425-385-9014 to discuss financing options. Our Spokane private lending experts specialize in assisting investors who acquire real estate investment properties … off-market or not. We have programs available to suit various investment strategies, we know that time is of the essence, and we’d love the opportunity to earn your business!

Also Check Out: A Guide to Investing in Real Estate in your 20s and 30s

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