Financing your real estate business can be a stressful, overwhelming process, especially if construction is involved. At HML Solutions, we’re here to make financing easy. Many traditional lenders consider construction lending to be a risky process, causing loan officers to spend a great deal of time reviewing project details before they can determine if they want to extend financing. By the time the process is wrapped up, you’ve likely spent hours of time going back and forth with your lender and signing pages of paperwork.
If you’re looking to have quick access to capital to fund your construction or real estate project, working with a traditional lender may not be the right option for you. The process can be time consuming, resulting in project delays and other issues. You may also miss important deadlines, which may be costly for your overal budget. As a business manager, every dollar counts and is important to help keep you on track and avoid missing important deadlines. Rather than work with a traditional lender, consider financing your project with a hard money loan, which can help you stay on track and within your budget.
Hard Money vs Traditional Construction Loans
Real estate investors need capital to fund their projects. With the changes in the market in recent years, it’s become more difficult for developers to reach out and obtain the capital they need by working with traditional lenders in a timely fashion. At the end of the day, real estate investors need money to help their projects succeed. In addition to market changes, the increasing regulatory requirements on banks result in an increased amount of paperwork and documentation, which have resulted in longer closing times.
Hard money loans, however, shine in this respect because they provide developers with an alternative to traditional funding. If you’re looking to meet a fast deadline and don’t want to wait on traditional lenders or government programs to receive funding, exploring the option available to you through hard money lending may provide you the best option for your project.
How are Hard Money Loans Funded?
Traditional construction loans are funded by financial institutions such as banks, hard money loans are instead funded through investors and investment groups working with hard money lenders. You’ll have greater flexibility with a hard money loan since they aren’t funded through a traditional banking institution, which must meet strict regulatory requirements.
When you work with a hard money lender, your construction loan is secured through a higher interest rate than one you might receive from a traditional bank, but in return the process will move much quicker than other financial institutions. Your lender may also require you to invest some of your own money into the project. The amount you’ll be required to invest depends on factors such as the project and your overall project experience, but you can typically expect to invest anywhere between 10 to 20% of the overall project cost.
Banks can often take several weeks to approve construction loans, and if you choose to work with a HUD financing program it may take months. With a hard money loan program, however, depending on the scop of your project you can close in days. Because of the quick turnaround on approval, developers may choose to work with hard money lenders over their traditional banks because their projects are on strict deadlines and don’t have the time to spend working with their bank to obtain a traditional loan.
As with any business financing, there are several considerations to keep in mind if you look at hard money and traditional construction loans. Some of the most common questions include:
- Your timeline: Your overall project timeline is one of the most important factors to keep in mind for any entrepreneur who works in the real estate construction industry. Financing your project can often be the difference between taking advantage of a great deal or completely missing out on it. However, to ensure overall success, keep in mind that timelines can vary depending on the lender for approving and funding a construction loan, and hard money loans tend to be much quicker than traditional lenders. If you’re running up against a hard deadline, a hard money loan may be the best option. Hard money construction loans can often be funded in as little as one week, whereas traditional lenders can take up to 30 days or more before you’ll receive the money you need. If you take the application process into consideration as well, the entire process can run an additional two to four weeks with traditional lending institutions. The application process for hard money loans can often be completed in as little as one to two days.
- Your loan structure: Your loan structure is another consideration to keep in mind when it comes to determining which loan type is best for your needs. Often, you’ll find traditional lenders take a one-size-fits-all approach to construction loans and don’t consider individual needs. The loan terms and conditions are set in stone with very little room to meet specific loan requests. Loan committees aren’t interested in examining the individual needs of customers and want their loan officers to consider projects that meet their rigorous requirements, with the only exception for long-standing bank customers with a proven track record. In the case of a long-standing relationship, lenders have a little more room for flexibility, but may take more time to complete special requests which still come with conservative loan terms. When you work with a hard money lender, you’ll often find much more flexible loan contract and repayment terms. This kind of loan allows the lender the flexibility to structure the financing in ways that benefit both parties. Hard money lenders can also offer several repayment schedules which are often structured to meet unique needs of borrowers, which can work within project deadlines.
- Will you qualify: Receiving a loan approval is the most important factor to keep in mind when it comes to construction loans, and there are several reasons a builder may be denied for a traditional loan. Even builders with a strong financial background may still have difficulties securing a loan if a traditional lender finds something during the application process that shows them you may not meet their rigid set of requirements of a conventional loan. This may include anything from insufficient paperwork or having a history of self employment. In contrast to a traditional lender, hard money lenders are able to look at more than simply the borrower or company’s financial history in question when evaluating a loan application. Instead, a hard money lender considers factors such as your ability to repay your loan and the overall scope of the project. Because hard money lenders take a look at the bigger picture instead of a set criteria, they’re often able to fund a wider range of construction and real estate projects than traditional lendrs are able to.
- The local factor: Another factor investors and borrowers often neglect to consider is what’s often called the local factor. With more frequent bank consolidations and buyouts, finding a local lending option can be even more difficult when securing funding for a project. Many national lenders work out of local sattelite offices, which makes it difficult to develop and maintain a close working relationship. Because they aren’t invested in their community and have no personal or local contact, if you have questions or issues with your project, you may end up spending time playing phone tag or hunting down someone who can answer your questions.
Which is Right for You?
When it comes to determining if you want to finance your project with a hard money or traditional lender, deciding on which option depends on several factors. If you have a history of being denied traditional loans, then it may be difficult to secure financing for your construction or real estate project. If this is the case, then hard money may be the best solution to help you fund your project. You may also choose a hard money loan if you need more flexibility than a traditional lender offers. Many builders also consider timeline when making a determination for which lender is the right choice. If you’re up against a tight deadline and need to move quickly on an opportunity, you may not want to spend a lot of time going back and forth with a traditional lender, since conventional loans tend to be much slower to approve and fund than hard money loans.
Remember, finding the right loan type for your project depends on the overall scope of your project, your individual circumstances, long-term priorities, and what terms you think will work best. Carefully consider these options before making a decision and talk to the right lender to help you reach your project goals.
To keep your construction projects on track toward completion, consider a hard money loan, which can give you access to capital fast. At HML Solutions, we’re equipped to help you with your construction loan or any other financing options you may be looking for. We’re happy to discuss your options with you to help design a financing package to yield long-term success. Give us a call today to find out more.