Whether it’s opportunity or disaster striking, sometimes you need more cash than you have on hand. Although you can sometimes borrow from friends or family, getting a loan from a professional lender is often a better path. The question then becomes, should you work with a conventional lender or a hard money lender?
Why You Might Need a Loan
People need quick cash for a lot of reasons. These are some common examples.
Property Purchase
One of the most common real estate loan types is a mortgage to purchase a primary residence that you intend to live in the majority of the time. Other types of property purchases include:
- Fix-and-flip: Create a profit opportunity when you buy a property, make the necessary improvements, and sell it for more than you put in.
- Rental property: Invest in a building that generates ongoing income. Depending on the property, you may also need funds for improvements.
- Short-term rentals: Secure enough funds to buy and fix up a distressed property. Currently, these trendy rentals can generate more income than long-term rentals in destination locations.
Business Need
Business owners occasionally encounter unexpected expenses or are presented with growth opportunities that require cash. Some reasons you might need a loan for your business include:
- Invest in growth opportunities: Grow your business by investing in new equipment or inventory that will allow you to increase sales or reach a new market.
- Cover payroll: You might find yourself in a cash crunch and need to meet your obligations to employees.
- Buy a building: Whether you have outgrown your existing space or want to capitalize on a hot opportunity, you may need a loan to purchase property for your business.
Certain types of businesses have extra hurdles when trying to secure loans. For example, cannabis companies or other alternative business types are often not able to get a conventional loan from a bank.
Private Line of Credit
Having immediate access to cash ensures that you are always prepared to jump on investment opportunities when they arise.
Why Working with a Conventional Lender Might Be Challenging
Conventional banks are great for getting the best interest rates for your home mortgage. However, if you need a loan for something else, you might encounter some hurdles.
Speed
Most loans take at least 30 days to close with a conventional lender. For complicated deals, it can take even longer. This might be fine for your personal mortgage, but if you need to act quickly as an investor to secure a real estate loan, a conventional lender is often too slow.
Borrower Qualifications
Traditional banks have borrower qualifications that you might not be able to meet, such as:
- Credit score: Banks require minimum credit scores and cannot be flexible on this.
- Income history: You need tax returns and pay stubs to demonstrate your income history, and banks offer very little flexibility. If you’re a new business owner or recently switched jobs, that may bar you from conventional financing.
- Seasoned funds: Down payment funds need to come specifically from the buyer and need to have been sitting there for an extended period of time.
Property Qualifications
Banking regulations also have requirements for the properties that get financed, including:
- Property condition: Conventional banks have limitations on the types of properties they can finance, and many distressed properties don’t qualify.
- Multiple homes: If you already own a home or multiple properties, you may not be able to get a conventional mortgage for additional residential properties, especially if you intend to own more than 10 properties.
- Type of business: When investing in properties for alternative businesses, conventional banks may either not be able to help you or create such hurdles that getting an expedient loan is not possible.
Why to Consider a Hard Money Loan
If you run into the stumbling blocks of borrowing with a conventional bank, working with a hard money lender is an alternative that comes with several advantages.
Speed
Hard money lenders can close in days—sometimes as fast as five days—not weeks or months. This gives you a competitive advantage in the real estate market and can make you the most appealing buyer, especially for sellers who want to move fast.
Borrower Qualifications
Hard money lenders can be much more flexible than conventional lenders when it comes to qualifying borrowers. Most hard money lenders don’t care about financials or credit. If you have equity, you can often get a hard money loan, even if you have a poor credit score.
Property Qualifications
Hard money lenders can also be more flexible with the deal because they care about equity. If you can demonstrate that your investment is likely to yield a return that allows you to repay the loan, a hard money lender may be able to help you when a conventional bank won’t.
Hard Money Loans with Socotra Capital
Socotra Capital offers hard money loans for a broad range of investment opportunities and life situations. Whether you need a bridge loan for your business or just found the perfect fix-and-flip, we can help you get cash fast. The approval process is quick and easy, and with our Turbo Close service, you may be able to get funds in as fast as five days.
If you would like to learn more about securing a hard money loan for your project, read The Borrower's Guide To: Process, Preparedness, and Timeline.
