How Does Hard Money Lending Differ from Conventional Lending?

Hard money lending bears similarities to conventional loans. For example, they share a similar structure of giving out loans and repayment before the due date. But still, there are differences in the application for hard money loans. For example, the loan terms, the use of the loan, and the repayment of the loan differ in substantive ways from conventional loans. One main difference is that the application process for hard money loans does not demand documentation than a conventional loan.

A bank uses the Debt to Income (DTI) Ratio because a bank is primarily concerned about a borrower’s creditworthiness. At times, a bank may require proof of employment, income verification, and a credit report with a loan application. All these are to verify that the borrower is capable of repayment. The DTI is obtained by dividing the borrower’s monthly debt payments by your monthly gross income.

While conventional banks use DTI, Hard money lenders use the Loan to Value (LTV) Ratio. It is because hard money lenders focus primarily on the soundness of the investment. Therefore, they request to know if the value of the investment asset can cover the loan. This is why a property appraisal is part of a  loan application requirements. LTV ratio is calculated by dividing the requested loan amount by the asset’s after-repair value (ARV). Hard money loans are usually short-term compared to a conventional mortgage.

Hard money loans are mostly for business products. Ordinary home buyers should choose conventional mortgages. Hard money loans are used to finance investment property that can be purchased, fixed if necessary, and returned to the market within months. They are used by serious real estate investors who have the time, resources, and energy to quickly turn around real estate investments.

To know more on this topic, differences between Hard money loans and Bank loans, continue reading here.

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