Comparing traditional financing and hard money lending side-by-side reveals quite a few differences. One of the biggest is approval time. Moreover, hard money lending has a clear advantage here.
For the purposes of this post, approval time is the amount of time that elapses between application and final approval. And final approval is the approval given just before loan documents are drawn up. I’m not counting preliminary approval or a contingent approval made in the middle of the underwriting process.
Traditional Bank Approvals
Though many banks offer preliminary approvals in a day or less, such approvals amount to little more than a marketing gimmick when you consider that any such approval could easily be revoked during the long and arduous underwriting process. To get to final approval, borrowers often need to endure a process that could take weeks or months.
Have you ever wondered why property closings are so frequently extended to 90 days when traditional funding is involved? It is because lenders need that time to complete their complicated underwriting processes. And at any point during underwriting, approval can be revoked. You never really know until loan documents are drawn up. And that could take months.
Hard Money Approvals
Hard money lenders are less likely to offer preliminary approval. They prefer a simple ‘yes’ or ‘no’ decision right up front. Final approval is usually given within 24-48 hours. Same-day approval is not even out of the question, according to Actium Lending based in Salt Lake City, UT.
How can hard money lenders work so quickly? Actium says it’s all about assets. Hard money lenders don’t have to go through the process of verifying borrower income and determining the borrower’s ability to repay. That is something banks do because they are compelled to under the law. But hard money is governed by different regulations.
Hard money lenders base their approval decisions on collateral. Let us say a real estate investor approached Actium lenders for a loan to buy a new piece of property. The property would act as collateral. Actium would want to see enough value in that property to cover the loan amount and the firm’s risk. If the value is there, approval is likely.
This process allows hard money lenders to approve loans as quickly as they can determine property value. If value can be determined in under 24 hours, approval can be given just that quickly.
Faster Approval Equals Faster Funding
Faster approval has a fringe benefit hard money borrowers appreciate – faster funding. Let’s go back to Actium Lending and a real-world case from their files. They were once approached by a client whose bank backed out of financing a property acquisition less than one business day prior to closing. It was a Friday morning, to be specific.
The client approached Actium in hopes of getting a loan. Actium was able to verify the property’s value that afternoon. Approval was given and loan documents were drawn up before the close of business that day. First thing on Monday morning, the loan documents and full funding were transmitted to a designated title company. The deal was saved.
No bank could have done what Actium did. This isn’t a knock on banks, it’s just the reality of their underwriting processes. They aren’t designed for speed.
When Approval Times Matter
Looking at real world cases makes one thing clear: when approval times matter, hard money lending has a clear advantage over traditional financing. Hard money certainly is not the right option for every funding need. But it sure has a lot to offer in terms of fast approval and funding.
