Why Choose Hard Money Lenders Over Traditional Loans for Real Estate Investments

March 18, 2022

In today's fast-paced real estate market, it's more important than ever to move quickly when making decisions about your investments. The speed necessary to capitalize on a new purchase means that you need a financing option in place that can provide you with the funds you need in a hurry. Keep reading to learn more about your options and how to secure a loan fast.

Traditional Lenders

When it comes to financing a real estate investment, traditional lenders are probably the first thing that comes to mind. This familiarity is because they've been around for a long time, and most people are familiar with their process. However, there are several drawbacks to using a traditional lender.

Time Isn't on Your Side

The biggest drawback is the time to get approved. Traditional lenders can take a long period to approve a loan, primarily if the property is an investment. They also require a lot of paperwork and documentation, which can even slow down the process.

A conventional lender can ask for things like W2s, tax returns, pay stubs, and more, including a detailed business plan. Even if you meet the basic criteria, you may run into roadblocks during the underwriting process, such as a low credit score or too much debt that can prevent you from getting the loan.

Increased Overall Cost

Another downside is the interest rates. Traditional lenders typically charge higher interest rates than hard money lenders. The more expensive price tag on the loan occurs because they're taking on more risk by lending money to someone who is not a traditional borrower. You may experience a higher interest rate even if your credit score is good, and you could lose your property if you can't make the payments. Go into these loans with a solid plan to succeed.

Hard Money Lenders

If you're looking for an alternative to traditional lenders, look no further than hard money lenders.

Restrictions and Protocol

Another drawback is that traditional lenders often have strict guidelines for approving a loan. For example, they may only lend up to 80% of the property's value. This restriction can present you with a problem because it means you need to come up with the other 20% yourself.

When you're in a hurry and need money, this can be a significant challenge. You want a more flexible solution, and you won't get it with traditional lenders.

Conventional loans also often restrict the property type. For example, a lender may bar properties in certain conditions, such as needing too much work or in a location they deem as high-risk.

Long-Term Commitment

Finally, traditional loans are often long-term commitments. Lenders want to make money off your investment for as long as possible, so they'll typically give you a loan with a term of at least a decade. If you're not planning on holding the property for that long, this can be a significant issue.

Hard Money Lenders

Now that you know all the drawbacks of using a traditional lender, here's a look at hard money lenders in Los Angeles. These lenders are private individuals or companies who provide short-term loans to borrowers for real estate investments.

The benefits of using a hard money lender over a traditional lender are:

Faster Approval Time

One of the most significant advantages is the fast approval time. Since there is less paperwork and documentation required, you can get an answer within days instead of weeks with a traditional lender.

No Restrictions on Property Type

Hard money lenders also don't have any restrictions on the type of property you're buying. This gives you more flexibility when looking for new investments. You won't need to worry about a lender telling you the property is too risky or requires too much work. Your non-traditional loan is easier to lock down because you're using collateral.

However, remember, failure to repay the loan could cause you to lose your property. The default can cause further problems, such as a hit to your credit score. Make sure to only borrow an amount you can afford to pay back.

More Flexible Loan Terms

Another significant benefit of hard money loans is the loan terms are more flexible. Lenders will typically give you a loan for 12 months, which provides you with plenty of time to fix up the property and sell it or refinance to a traditional loan. Most conventional lenders want much longer terms, such as 10-plus years. These aren't favorable if you're looking to flip the property quickly.

Fewer Requirements

Hard money lenders have fewer requirements than traditional lenders. They don't require W2s or tax returns, so it's easier to get approved. Also, you won't need a minimum credit score to qualify.

Instead, the lender looks at the property's value to make their decision. What you use for collateral is more important to a hard money lender than your credit rating, how much money you earn yearly, or your employment history.

High-Interest Rates

The only downside of hard money loans is the high-interest rates. The average rate is between 10% and 12%, but it can be higher or lower depending on the lender. Shop around to find the best rate in Los Angeles. You can find a hard money lender that fits your needs.

But, even with the higher interest rates, hard money loans are still a better option than traditional loans for real estate investors. The fast approval time, flexible loan terms, and lack of restrictions make them the best choice when you need to secure funding.

When looking for a loan to invest in real estate, weighing all your options is crucial. Traditional lenders have been around for a long time and are a good option for some people. However, they're not the best choice for real estate investors. The fast approval process, lack of restrictions, and flexible loan terms make hard money lenders the better option for most people looking to flip a property fast.

 

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