Banks and credit unions often need months to approve and fund certain types of sizable loans, like mortgages. The same goes for commercial loans made by traditional financial institutions. Hard money lenders can typically approve and fund in a matter of days. But is there ever a situation in which a hard money lender might need a couple of months?
Given the highly flexible nature of hard money lending, anything is possible. It could theoretically take months for a lender to approve and fund a hard money loan. But the likelihood of such a scenario is so remote that it is almost not worth considering.
It’s All in the Design
Spending months determining eligibility and underwriting for a loan would most certainly defeat the purpose of offering hard money to begin with. Hard money lending has been designed, from the ground up, to avoid that very thing. So if a lender cannot be sure about making an approval decision in a day or two, the loan in question probably won’t be approved anyway. It doesn’t make sense to dig around for months.
Traditional lenders require so much time because they have so much digging to do. Bank and credit union lending is based on creditworthiness. In other words, a traditional lender goes to great lengths to fully understand a borrower’s perceived ability to repay. If that ability is lacking, a loan will not be approved. But lending institutions cannot make the decision overnight.
Take your traditional mortgage. A bank needs to look into the borrower’s income and debt load. The loan officer needs to dig into the borrower’s credit history and score, any outstanding debts still on the books, previous bankruptcies, and foreclosures, and on and on. But the bank also needs to look at the house under contract. If it’s not valuable enough, the bank will not take a risk on it.
Banks Also Need Documents, And Lots of Them
In an attempt to understand even the finest details of a borrower’s finances, banks need a lot of documentation. They ask for a ton of it up front. Then, as the approval and underwriting process plays out, most banks need more documents. It is a constant back-and-forth with the bank asking for more documents and the borrower scrambling to provide them.
Hard money lending is entirely different. Lenders can approve and fund in a matter of days because their decisions are not based on a perceived ability to repay. They are based on the value of whatever collateral the borrower offers.
Hard Money Is Asset-Based
Actium Lending, a Salt Lake City, UT hard money lender active in three states, explains that what they do is known in the industry as asset-based lending. Their primary concern for loan approval is the value of the borrower’s collateral. If the value is enough to satisfy the lender’s risk profile, a loan is likely to be approved.
Actium says that the majority of hard money borrowers are real estate investors looking to acquire new properties. Those properties are offered as collateral. So imagine an investor hoping for a $500k loan on a property worth $1 million. He’s only asking for 50%. If a property appraisal confirms its value at $1 million, the chances of approval are pretty good.
By design, hard money loans can be approved and funded in days. It would be just about unheard of for a hard money lender to ask for months to put together a package. If it takes that long, there is something out of order – something that would prevent approval anyway.
