Banks are usually the first option when individuals and companies need to borrow. They offer a valuable service, albeit one that tends to be slow. Hard money lenders also offer a valuable service. But by comparison, they are lightning fast. So what’s the deal? How can hard money lenders move so quickly?
Hard money lenders are private lenders as opposed to banks owned and controlled by shareholders. Private lenders and banks are viewed differently under the law. As such, both have their own requirements in terms of approval and funding. In a nutshell, the different requirements explain why they move at such different paces.
Banks Conduct Exhaustive Credit Checks
Bank lending is based on the principle of full faith and credit. In other words, banks need to rely on a borrower’s promise to repay along with that individual’s history of past performance. Managing their risk requires banks to conduct an exhaustive credit check.
Hard money lending is not based on borrower full faith and credit. It is based on borrower assets. Borrowers put up assets that act as collateral. As long as collateral is strong enough, approval is likely. The lender doesn’t have to do an exhaustive credit check.
Documentation Needs Are Different
Exhaustive credit checks are just the start of the process for banks. They are also required by law to leave no stone unturned in determining whether a borrower can actually afford to take out a loan. If you have ever borrowed for a mortgage or a business need, you know what this means in terms of documentation.
Banks require tons of documentation covering everything from income to current debt load. When it’s a business loan a bank is considering, the borrower may even have to furnish P & L statements and several years’ worth of tax records.
Once again, hard money lending is different. Documentation requirements are significantly less because lenders do not have to verify affordability. Affordability is wrapped up in the collateral. If the borrower’s collateral is strong enough to support the desired loan, the lender is usually good to go.
An Appraisal Is the Big Thing
For hard money lenders, speed really isn’t an issue. The only thing that tends to slow them down is appraising borrower collateral. But even that is not a problem for lenders capable of handling appraisals in-house.
Out in Salt Lake City, UT, Actium Partners once got a call from a desperate client whose bank had backed out on him at the 11th hour. He called Actium on a Friday morning in need of financing to finish a deal scheduled to close on Monday.
Actium sent an appraiser to the property later that day. By Friday afternoon, office staff was busy preparing loan documents. The client’s loan was approved, and both the documents and funding were sent to the title company on Monday morning. Problem solved. The deal closed on time.
Hard Money Is More Streamlined
The best way to sum all of this up is to say that hard money is more streamlined than bank lending. It is designed to be that way. Hard money lending is riskier for both lenders and borrowers alike. The last thing they need is a difficult approval and funding process that makes things more complicated than necessary.
Hard money lenders can move so quickly because they do not have to run exhaustive credit checks. They can approve loans based largely on collateral rather than having to verify borrower income, credit worthiness, etc. Both factors mean significantly less paperwork, thereby reducing the amount of time it takes to get things done.