If Nothing Else, Hard Money Is Fast Money – Here’s Why
There is a lot to be said about hard money and how it works. Although it is simpler than conventional lending, hard money still has its quirks. It also has its advantages. At the top of the list is speed. If nothing else, hard money is fast money.
How fast? Salt Lake City’s Actium Partners has been known to approve and fund loans in less than 24 hours. That is not the norm, but it is possible when circumstances dictate. The average hard money loan is approved and funded in two or three days.
The question is one of how hard money lenders get away with it. Why can they approve and fund in days while it takes banks weeks or months? Actium says it is in the process. However, the process is tied to how different types of loans are structured. Understand that and hard money’s speed makes more sense.
How Bank Loans Are Structured
Bank loans are structured around two key things: regulations and a borrower’s credit worthiness. The nature of both explains why it takes banks so long to approve and close loans. Let us look at them in more detail.
As far as regulations are concerned, banks and credit unions are tied to a lengthy list of rules and regulations at both the federal and state levels. Those rules and regulations were tightened considerably after the 2008 housing crash. Regulators made it more difficult for banks and credit unions to lend to people who might be on the edge of affordability.
That leads us to the idea of credit worthiness. The principle itself is based on a borrower’s ability to repay and his willingness to do so. In order to determine that, lenders need to look at a lot. They dig into a borrower’s:
- Current employment and income.
- Credit history and score.
- Current debt load ratio.
- Tangible assets.
- Bank accounts and tax returns.
Processing all the documents takes time. Verifying a borrower’s information takes time, as well. And of course, you have multiple people reviewing documents during the underwriting process. The more people involved, the slower the process is.
How Hard Money Loans Are Structured
Hard money loans are much simpler because they are structured around one thing and one thing only: collateral. Hard money lending is known as asset-based lending because lenders require a hard asset as collateral for the loan. The value of that collateral provides the basis for a lender’s approval.
If the value is equal to or higher than the amount being requested, approval is likely. If it is not, the borrower’s application will be denied. That is pretty much it. Hard money lenders only need to review a minimal number of documents to verify borrower information. As such, the entire underwriting process can be completed in hours if all things line up properly.
Even if not, it rarely takes more than a couple of days to complete the underwriting process. Meanwhile, an appraiser is sent to take a look at the collateral in question. With a positive appraisal and paperwork completed, the lender can approve funding. The money can be transferred electronically for instant financing following approval.
Keep It Simple, Keep It Fast
The speed at which hard money lenders work is attributed almost exclusively to a simple underwriting process. Keep it simple and to keep it fast. Fortunately, asset-based lending is about as simple as it gets in financial services. There isn’t a ton of paperwork to look through. Underwriters do not have to look at every detail of a borrower’s financial life. That is why they can work so quickly.