The mortgage meltdown of 2008 triggered the Great Recession, which prompted banks to tighten credit and raise underwriting standards. This in turn gave impetus to alternative, or non-bank, lending, a sector that includes hard money real estate lenders. Each type of lender has its own characteristics, but five differences between bank and hard-money lending form a stark contrast:
- Credit ratings: Banks predominantly rely on credit ratings and credit histories to evaluate loan applications. Consumers with less-than-good ratings or scant credit histories have virtually no chance of receiving a bank loan. Non-bank lenders are in general much more willing to provide loans applicants with low credit ratings by adjusting interest rates, demanding collateral, and/or using alternative underwriting methods.
- Speed: Banks are notoriously slow to approve loans. They require voluminous paperwork and extensive credit checking as the process slowly grinds through the bank’s loan committee. Hard money lenders usually offer a streamlined application process and rapid approval/funding, often depositing loan proceeds in as little as one business day.
- Size of loan: Lenders use the loan-to-value (LTV) ratio to establish the maximum amount it will lend on a parcel of real estate. But many borrowers don’t realize one important difference between banks and hard money lenders. Banks base their LTV calculation on the current value of the property, whereas hard money lenders use the estimated value following renovations. This means that, even if a bank uses a higher LTV ratio, flippers might be able to borrow more from a hard money lender. The more ambitious the rehab project, the more the flipper can borrow from a hard money lender. That’s not true for bank loans.
- Minimum loan: Many banks have a minimum size loan threshold that bars small loans. A bank’s bureaucratic overhead costs preclude it from extending loans that are not “profitable,” which is how it sets the minimum loan size. Non-bank lenders are typically lean operations with much lower operating costs, allowing them to offer smaller loans.
- Interest rates: Banks can afford to offer the lowest interest rates because they lend only to applicants with gilded credit ratings. Non-bank lenders charge higher interest rates in return for greater loan access. Some hard-money lenders, like Specialty Lending Group, offer very competitive interest rates.
Specialty Lending Group provides hard-money and bridge loans to flippers and developers in the Washington DC region, including surrounding states. We provide loans against the following types of collateral:
- Non-Owner Occupied
- Single Family Investment Property
- Multi-family
- Condo Conversion
- Commercial Property
- Retail, Office and Mixed Use
If you are looking for quick approval, fast closing and easy accessible funds, contact Specialty Lending Group today.