Financial Tips

Hard Money vs. Traditional Financing: Which Is Better for Construction Loans?

For most real estate investors, the first order of business is to find a property that will generate profits. One way to finance the purchase price and rehab costs is through construction loans for real estate investors.

What Are Construction Loans?

Source: localfirstbank.com

A construction loan is a short-term financing solution for real estate investors who need to invest in a property to either build something from the ground up or do renovations on an already existing building.

The loan allows you to borrow money from a lender, complete the project, and repay the loan with interest.

The loan terms vary based on several factors, including the type of lender you choose and the length of your project. Construction loans can also be used if you plan to build a home from scratch or add on an addition to your existing home.

Traditional Financing

Source: housing.com

Traditional financing is what most people think of when they hear the word “loan.” Banks and other financial institutions offer this type of financing to qualified borrowers. Loans are typically approved based on criteria, including credit score, income, down payment, and other debt obligations.

Hard Money Financing

Source: arcprivatelending.com

Hard money financing is a kind of alternative financing that uses private money rather than institutional bank funding. Hard cash is appropriate for borrowers who cannot obtain a mortgage through conventional methods, such as the bank, or who need capital in a hurry.

Hard money financing comes from individual investors or small investment firms. The terms can be more flexible than you’d find with traditional lenders like banks, which makes hard money an excellent option for borrowers who have been turned down by banks or who need to close on a loan quickly.

Click here to learn more about how you can acquire a construction loan for your project.

Why You Should Consider Hard Money Financing

1. Fast Approval Process

Source: smartline.com.au

Unlike conventional lenders, hard money lenders can fund within days instead of weeks or months. Starting a project quickly can be crucial to maximizing potential profits on your investment property.

If you’re buying a discounted property at auction, you’ll need quick funding to close before someone else does and buy the property at the price you want. In contrast, banks can take anywhere from 30 days to a few months before funding your loan.

2. Underwriting Flexibility

Hard money lenders focus on the collateral property instead of your credit profile and income. They want to know about your project’s viability more than anything else. In many cases, they’re even willing to lend up to 90% of the completed value of the home or building.

Borrowers with a poor credit score may also find it difficult to secure a conventional loan due to their low credit score, making hard money lending an attractive option.

3. Competitive Rates

Source: indiabullshomeloans.com

A construction loan can be quite expensive, and this is something that not all borrowers can afford. The good news is that hard money lenders offer competitive rates which allow you to get the right amount of funding at the right price.

The Final Word

Hard money financing is an excellent option for residential and commercial construction projects. Compared to traditional loans, hard money loans offer more flexibility and less paperwork.

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