It’s well-established that hard money loans are more expensive than loans from institutional lenders or banks. So why do investors ever use hard money loans? While the reasons are numerous and varied, they typically fall under one of four broad categories:

1. Qualifying Problems. Banks have strict qualification requirements for both borrowers and properties for commercial mortgages. There are myriad reasons why an investor might not qualify, including: low credit scores, too much personal or business debt, or the property doesn’t produce enough income. If the property you want to borrow money for needs rehabilitation or repairs, then banks are not likely to approve you unless the project is very large or you have a very extensive (and successful) track record.
   Hard money lenders are an important resource in such situations because, unlike institutional lenders who are concerned with appraised value, borrower credit, and property credit, hard money lenders focus on the value (appraised and fair market) of the property, so the borrower’s credit (good or bad) is not an issue.
2. A Need for Speed. Conventional commercial mortgages usually take anywhere from 60 to 90 days to close. The additional requirements that conventional lenders have to meet translate into additional documentation and paperwork that is required to secure the financing. They will typically need the following in addition to the property appraisal: detailed credit history for the borrower, proof of current financial status, and financial statements and tax returns for the borrower and all of his or her properties and business interests.
   Hard money lenders can usually underwrite loans in 7 to 10 days if necessary. They require much less financial information since the loan is secured by real assets rather than borrower credit. Private lenders will often make approval decisions within 24 hours, whereas institutional mortgages are approved by committees that only meet once every week or two weeks. Investors are far less likely to experience delays in the approval phase if they borrow from a hard money lender rather than a bank.
3. Privacy Concerns. Sometimes borrowers either do not have or do not wish to disclose all the financial information that banks require for a conventional commercial mortgage.
   Private lenders are much more willing to take extenuating circumstances and the borrower’s character into account than are institutional lenders.
4. More Money. An investor may actually be able to borrow more from a hard money lender than a bank, reducing the amount of his or her own capital that must be invested. Institutional lenders generally base loan amounts on the lesser of property’s cost or the property’s appraised value, while private lenders base them solely on appraised value. If an investor is able to buy a property for markedly less than market value, then he can get more funding from a hard money lender than a conventional lender. Hard money lenders are also more likely to be willing to include funds for repairs or rehabilitation in the loan.

While hard money loans do often have higher interest rates and costs, there are definitely situations in which these costs are outweighed by the benefits for savvy commercial real estate investors.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.