Quite a few things distinguish hard money from traditional bank financing. From the lender’s perspective, the difference between borrower financial position and collateral value is big. In fact, it is the main factor that separates hard money from traditional lending.
Hard money lenders like Actium Partners are more interested in collateral than the borrower’s financial position. Traditional lenders are just the opposite. Needless to say, this is no small difference. Our respective priorities determine how we process loans, how we approve them, and even how we fund them.
Borrower Financial Position
We could define borrower financial position using a lot of complex terminology and illustrations. But to put it simply, it is nothing more than an assessment of a borrower’s ability to repay based on current circumstances, history, and future expectations. Banks take a good, hard look at financial position before they approve loans.
If an investor were to approach a bank to fund a property acquisition, the bank’s need to understand that borrower’s financial position would have them looking at:
- personal income
- assets, and liabilities
- credit history and rating
- profit and loss statements.
The bank would leave no stone unturned in trying to determine whether the borrower can truly afford to borrow. By the way, we don’t see that as a negative thing. Confirming a borrower’s financial position is part of their business model. It is the way they have to do things. Still, that’s why it can take months to secure funding from a bank.
Collateral Value
Hard money is different in that lenders do not put a heavy emphasis on a borrower’s financial position. It is the offered collateral that matters. To hard money lenders, collateral is what provides risk mitigation. If the necessary value is there, hard money lenders are more likely to fund the loan.
An ideal situation combines lower LTV and existing equity to minimize the lender’s risk considerably. In the event of default, the lender should have no trouble selling the collateral to recoup the loan amount plus added costs.
Processing and Funding Loans
The differences between borrower financial position and collateral value extend beyond underwriting and approval. They also affect loan processing and funding. And where both are concerned, speed is one of the primary advantages of hard money.
Because a hard money lender isn’t so concerned about the borrower’s financial position, days and weeks are not spend pouring over all sorts of financial documents. The lender is not looking for every single detail related to the borrower’s past. Practically speaking, appraising the borrower’s collateral takes a lot less time than digging through reams of financial data.
Faster loan processing generally leads to faster funding. As just one example, we funded a real estate investment a number of years ago in less than one business day. It was a Friday afternoon when we received a call from the client seeking a fast loan to ensure closing on Monday. It turns out that his lender backed out at the last minute.
We appraised the property the same day, then drew up the documents later that afternoon. We were able to send documents to the title company on Monday and fund the loan. We couldn’t have worked so quickly had our business model depended on verifying the borrower’s financial position.
The differences between borrower financial position and collateral value epitomize the differences between traditional financing and hard money. They are big differences to anyone who has utilized hard money to fund a real estate transaction. Are you interested in learning more? Reach out to us at your convenience.
