Experienced real estate investors know that hard money loans are an important tool in your investing toolbox, but they also know that these loans don’t work well in every situation. If you’re able to easily qualify for a long-term, lower interest traditional mortgage, then the additional expense of a hard money loan doesn’t make sense. However, there are myriad situations in which these extra costs are cancelled out by the quick turnaround times, asset-based underwriting, and minimal red tape associated with these private capital loans.

Here are five of the most common situations in which you might look to a private lender for funding in lieu of a conventional lender:

1. You need to complete capital improvements, repairs or other renovations. Bank lenders only want to lend money for properties that are “market ready”; however, private lenders are much more willing to lend money to improve a property and will usually base their loan-to-value (LTV) ratio on the property’s “after repairs” value rather than its current condition.
2. You want to purchase a property quickly. Commercial real estate deals are often time-sensitive, so having the ability to close a loan in a matter of weeks rather than months can mean the difference between grabbing up a great property and losing out to someone else who got funding faster.
3. You need time to stabilize an underperforming property. If you want to refinance or renew a longer term mortgage but your property can’t qualify because it’s underperforming, a hard money loan can help you by providing short-term bridge financing while you get the property’s income stream back on track by filling vacancies, making improvements, and increasing rents if possible.
4. You have problems with your credit history. Bank lenders are strictly limited by federal regulations that rely heavily on a borrower’s credit score and credit history. However, while private lenders will take this information into consideration, a lower score or issues in your credit history are not an immediate rejection. Rather, they will ask you to explain any problems and to share with them why you believe in this project for which you’re requesting financing.
5. You have too many financed properties in your portfolio. Bank lenders have to consider more than just the one loan for which you’re applying; they must also look at your global debt picture (i.e., how many other properties you’ve already financed), which can become problematic for investors with multiple projects going on at the same time. Private lenders are less likely to care about other properties you’re financing since their underwriting process secures each loan against the property rather than the borrower.

For more information about when a hard money loan is the right choice to make, contact Montegra at 303-377-4181.