Have you ever sought an auto loan or a mortgage? If so, you’re probably familiar with the notion of having to jump through hoops to be funded and approved. These hurdles are directly related to the approval criteria that mortgage lenders and banks have to comply with. The rules are different for hard money.
In the context of private lending, that is,s hard money lending, it doesn’t have the exact regulations and rules. They have much more flexibility, from loan structure to customizing rates and conditions. You can imagine that private lenders have their own criteria for approval.
Lenders Set Their Own Policies
Hard money lending may be individual as well as groups of investor that choose to pool their funds. They could even be organized as businesses, such as Salt Lake City, Utah’s Actium Lending. One thing they’re not is the equivalent of a bank. Banks and hard money lenders are two distinct entities.
The lenders who lend money to hard-money borrowers have a major advantage, and they can reasonably set their own guidelines. They are able to take on as many risks as they want, provided they treat borrowers in a fair manner in accordance with the law. What exactly does that mean for appraisal metrics? It means that lenders like Actium Lending can establish whatever requirements they wish to meet.
While there aren’t any set guidelines, Actium says that most private lenders relyono two aspects when making decision-making decisions regarding approval:
1. Collateral Value
Hard-money lenders are required to provide some form of collateral to secure their loans. Real estate is the best option in the majority of cases. Lenders scrutinize the collateral in order to evaluate its worth and potential. If they are satisfied with the collateral they are looking at, then they are able to proceed to the next option.
2. Borrower Exit Plan
They are usually made as interest-only loans, which means that the borrower pays only interest until the final payment. The final payment is made up of the entire principal as well as interest. Therefore, lenders would like to know if there is a viable exit strategy. They need to know how the borrower is planning to pay the final payment when it is due. A sensible exit plan can make the approval of a hard money loan much easier to be approved.
Approval Metrics for Traditional Lenders
Traditional loans are able to offer lower rates of interest and longer terms than hard currency; they have more stringent approval requirements. The criteria are set by state and federal laws that are in place to protect both borrowers and lenders. A lot of the regulations currently in place were not even in existence before the housing crisis. We know how it turned out.
In any case, stricter approval standards will require more effort on the part of lenders. Mortgage lenders and banks need examine:
- The income streams of Borrowers
- History and credit score
- Debt-to-income ratios
- The sources of down payments and the reasons for them
Traditional lenders will not leave a mark unturned when trying to determine the creditworthiness of a potential borrower. This is why they keep reviewing everything from the borrower’s paystubs, tax documents, and bank statements.
Trust Deed Arrangements
Hard money lenders are able to take on more risk due to the way in which their loans are constructed. A loan that is backed by collateral of property is generally structured ina trust deed arrangement. Without going into details, this arrangement makes the resolution of a default situation very simple for lenders. In contrast, banks have to go through a lengthy foreclosure process that can be a year-long or longer.
The approval rates between traditional and private lenders are vastly different. It is all about the manner in which both types of lenders operate. In contrast, hard money lenders have much more flexibility.