Hard money construction loans are not like your conventional loans from financial institutions such as banks. They are costlier, with the elimination of tedious lending processes by banks, which take weeks to months. Real estate financing is as tough as it gets, especially for construction investments. No money lender is willing to take the risk without meticulous analysis of everything they need to know before making the deal.
Traditional loans vs hard money construction loans
The real estate industry has always struggled when it comes to funding from traditional loan lenders. The documentation and paperwork make it difficult for the most part. It is the major reason for a lagging timeline set for completing a construction project.
If that gets approved in time, the banks certainly don’t make it easy if any setback falls into action, especially for a construction loan. The loans and its documentation process for existing property are comparatively easy to get through. But, the same is not the case with construction loans. That’s why investors and developers prefer hard money construction loans.
If you have been rejected by the financial support of traditional institutions or need to speed the process, hard money loans for construction are preferable. There are many reasons to consider this option. For instance, your project is not fit for conventional banks or doesn’t meet the criteria. Also, if the deadline is your major concern when it comes to loan documentation.
That doesn’t mean all terms will be favorable or acceptable. It is important to note that hard money construction loan lenders charge a comparatively higher interest fee. They also have certain terms lined up before lending the loan. However, as mentioned earlier, all construction loans are costlier than other real estate loans, no matter what option you choose.
The lender asks you to invest at least 10-20% of your own capital in the project costs. The amount varies based on experience as well as the project scale. As hard money loans are provided by the investor groups, investors, or hard money lenders, they are not subject to stringent terms like banks. On the contrary, they offer greater flexibility to lenders as well as partly to the borrower.
Things to consider
Timeline
The timeline is a major concern for most developers. If you don’t get funds within the set timeframe, you might lose the project. On the contrary, if your loans get approved on time, it can contribute to the project success initially. Therefore, hard money lenders have quicker approval time.
What is the criteria for hard money loan approval?
While traditional banks leave you baffled with the application process and whole approval timeline, hard money only has a set of requirements that you have to meet. Their application process doesn’t require the credit score, or your ability to repay the loan. They may pass your loan within a few days. For instance, traditional institutions might straight away reject your construction loan request if you are self-employed or new in the industry.
Nevertheless, hard money lenders look for what you can invest, how you wish to make the project successful, whether you are willing to accept their set of terms, and what they can get with this investment.
In a nutshell, hard money construction loans are considered a wise choice. With that said, it is true that renowned developers who have high credibility and ties with traditional lenders such as banks also opt for hard money loans for all things considered.