In general, obtaining financing for an investment property can be difficult. Since conventional loans can be hard to obtain, many investors are using hard money lending. This begs the question, why don’t banks lend to investors?
Timeframe of Closing
The key to acquiring investment deals in this competitive marketplace is to be able to close quickly on a property. Banks are typically unable to offer financing in such a short time frame, causing investors to miss out on potential investment properties. Banks also need additional documentation and information regarding the status of the property that an investor may not have at the time of purchase.
Property Condition
If your property is undergoing more than a few cosmetic repairs, traditional lenders are going to be reluctant to supply funds. Often this is because of the risk of acquiring an asset in serious disrepair due to an investor’s inability to perform value-add renovations. Banks have become more cautious because historically, their real estate mortgages have turned toxic; meaning the mortgage underwriting the property is valued higher than the property itself.
For example, if you ask for a loan to buy a house worth $200,000, but you will need an additional $50,000 for repairs, your lender will not approve the $250,000 loan because the property is not currently valued that high. Additionally, many banks require the home to be in livable condition regardless of its status as an investment property.
Credit Standards
Credit requirements are much tighter than they were before the bubble burst. Factors including: credit scores, payment history, and length of established credit affect your ability to acquire a loan.
Risk
It is well-known that investing in real estate is risky. Not only are investment properties often in need of significant renovations, with the market tightening, many homes are bought without an inspection contingency on the offer. Even just a few unforeseen circumstances in a project can alter the construction budget and skew projected profits. Conventional lenders prefer to finance new construction projects rather than rehabilitation projects.
Ease of Application
Banks must be compliant with the Federal Deposit Insurance Corporation (FDIC) which requires borrowers to provide an extensive amount of information prior to obtaining a loan. Some of the required information includes but is not limited to: tax return documents from the past three years, business financials, personal financials, and credit checks. While a hard money lender will require some information before giving you a loan, the checklist is much shorter than that of a conventional lender.
As an alternative to conventional lending, many investors are using hard money lending for the following reasons.
A hard money lender allows you to close in days, rather than in weeks or months. Hard money lenders rely less on your credit status and more on the asset that you plan to purchase as a requirement for getting approved for a loan. Given their reliance on the asset as a component for loan approval and their familiarity with the real estate market, hard money lenders are more disposed to financing rehabilitation projects than conventional lenders.
*Created for Intrust Funding