Three Reasons Hard Money is Better Than Bank Money

2. Flexibility 

Banks are highly regulated, with strict guidelines that must be met before they are able to originate a loan. Criteria like high credit scores, easy-to-document income, and liquidity are essential to getting a deal done. Many banks also want to see cash flow from a property, which vacant homes under construction will not produce.  

Hard money lenders have what I like to call common-sense underwriting standards. Sure, they need to do some due diligence to ensure they keep their money safe, but they understand that a successful project is what is needed to get paid back not W-2 income.  

For example, being a self-employed borrower with an irregular income stream could easily prevent a bank from loaning money to you. But if you have a strong deal, a co-signer, or something else that makes the hard money lender comfortable, they will still loan you the money.  

It is about telling your story on what you plan to do and how you plan to pay the loan back. Because there is so much flexibility with hard money lenders, each one will have different standards or guidelines, and each will have different areas where they are willing to make exceptions.  A good credit score may be required for one, while another may not pull your credit at all.  

Having a strong value proposition and brokering relationships are truly keys to having the money available when you are ready to purchase. 

3. Higher Leverage

This is probably what separates hard money lenders from banks the most. As stated, each hard money lender will have different guidelines, which include down payment requirements. Most hard money lenders will require a smaller down payment, while banks require large ones. 

For example, it is highly common for a bank to require 25% to 30% down on loans to real estate investors. It is also common for hard money lenders to only require 10% down. Sometimes, they will not require a down payment at all. 

Increasing leverage on a deal accomplishes several things. Money is finite, so everyone has a limited supply. Hard money is more expensive and will likely create less profit on each deal, but limiting the amount of down payments creates options. 

The real estate investor may be able to get a deal done that they would not have been able to if forced to put down 30%, or maybe they can do two or three deals instead of just one. Giving up some profit on one deal to enable a second or a third can easily create higher income. 

Hard money lenders allow investors to scale and accomplish more. This is the real key to why fix-and-flippers love hard money loans. 

Final Thoughts

All this said, there is an obvious downside to hard money loans. Higher leverage creates higher risk, and those high rates can turn a good deal into a bad one quickly. Investors should stay focused, stick to strict buying criteria, and move fast when utilizing this creative lending source.  

Hard money loans are an important and powerful tool that can create opportunities that are not possible with banks, but they are higher risk and should be used conservatively.