The Investor’s Edge: Hard Money Lenders vs. Traditional Banks

Banks are often not the best source of financing for real estate investors.

Real estate investors require fast, flexible funding tailored to a range of unique scenarios and opportunities—features that bank loans do not have.

But if investors aren’t getting cash from banks, where are they getting it?

In this article, we’ll explore the differences between banks vs. hard money lenders and the reasons why hard money loans are the superior option for investors.

What options do investors have for real estate financing?

Traditional bank loans are the most popular option for homebuyers, providing a range of loan products that are largely based on a borrower’s creditworthiness and the property’s value.

Typical loan products include fixed-rate mortgages, adjustable-rate mortgages (ARMs), and commercial loans.

Criteria for traditional bank loan approval includes:

• High credit score
• Income verification
• Debt-to-income (DTI) ratio
• Property appraisal

While this type of financing is a helpful solution for the average homebuyer, it poses numerous challenges for real estate investors, including:

• Lengthy approval processes
• Strict criteria
• Conservative valuations

Experienced real estate investors know that the best source of financing for their projects is hard money lending.

Banks vs. hard money lenders: Key differences

Hard money lenders offer investors an alternative financing route that focuses primarily on the value of the property rather than the borrower’s financial history.

These lenders are often private companies or individuals who can provide shorter-term loans more quickly than banks, making them a preferred choice for many real estate investors.

Let’s explore the differences between traditional banks vs. hard money lenders in several key areas.

Funding speed

• Banks: Generally takes between 30 to 60 days or longer, which can be a significant hindrance for real estate investors who need to quickly close a deal
• Hard money lenders: Can close on a loan in a matter of days or weeks, depending on the type of funding

Flexibility

• Banks: Follow strict lending criteria that include fixed loan products, rigid repayment schedules, and non-negotiable terms—which can be limiting for investors who need creative financing solutions
• Hard money lenders: Offer a high degree of flexibility when it comes to loan structures and repayment terms to accommodate the specific demands of each real estate project

Approval process and documentation requirements

• Banks: Require extensive documentation, including tax returns and income and employment verification
• Hard money lenders: Focus mainly on the value of the asset and the project’s potential

Prepayment options

• Banks: Often have prepayment penalties to discourage borrowers from paying loans off early
• Hard money lenders: Many allow investors to pay off loans early without penalty, which is helpful for those who want to move on to other projects without unnecessary costs

Rehab and construction financing

• Banks: Perceive these types of projects as risky and have difficulty appraising unfinished projects, so will require higher down payments or less favorable terms—if they offer them at all
• Hard money lenders: Recognize the value of these projects upon completion, and understand how important they are to an investor’s portfolio

Relationship and networking opportunities

• Banks: Typically are transactional, and focus less on individualized attention or support
• Hard money lenders: Focus on personalized service, support, advice, and introductions to other industry professionals

Hard money lending options for investors

Hard money loans are designed for specific types of real estate projects and goals.

Park Place Finance offers a range of loan products to fit these needs.

Fix-and-flip loans

Fix-and-flip loans are designed for real estate investors looking to purchase properties, renovate them, and sell them for a profit within a short period. 

These loans cover the purchase price and the renovation costs.

Park Place Finance can close on fix-and-flip loans as fast as three to five business days.

Loan approval is largely based on the property’s after-repair value (ARV).

DSCR loans

Debt service coverage ratio (DSCR) loans are based on the property’s potential to generate income rather than the borrower’s finances.

They are ideal for rental properties, where the property’s income is a reliable indicator of the borrower’s ability to repay the loan.

DSCR formula: Net Operating Income (NOI) / Total Debt Service = DSCR

A DSCR of greater than 1.0 indicates that the property’s income can sufficiently cover its debt obligations.

Bridge loans

Bridge loans are short-term financing solutions that “bridge the gap” between the need for immediate funding and a more permanent solution.

For example, if an investor needs cash fast to cover the purchase of their next investment property before they can sell their current property, they could use a bridge loan.

Ground-up construction loans

Ground-up construction loans cover the costs to purchase land and construct a new building.

Funding is dispersed in stages based on construction milestones.

Construction loans from Park Place Finance can be used for ground up, new construction or to renovate a mid-construction project.

Why hard money lending is the superior option for investors

Private lenders open up opportunities to investors that they may not be able to access otherwise.

Hard money loans are perfect for the following investor needs and scenarios:

• Quick closing on a competitive property
• Short-term or long-term financing needs
• Those with less-than-ideal credit or irregular income
• Business owners or self-employed individuals
• Fix-and-flip projects
• Renovation or construction projects
• Purchasing auction properties
• Real estate portfolio expansion
• To pull equity out of an existing property

Real estate investors have the ability to make a profound impact on communities through renovation projects and new construction projects that increase the housing supply and add more diverse housing options.

Banks are limited in their ability to support unique or challenging real estate projects, while hard money lenders are able to thrive in this lending space.

Apply today with Park Place Finance

Park Place Finance is your trusted hard money lender for your next investment property.

We have funded over $1 billion in loans across 47 states and 17 years in business—and we hope your project is next.

Nationwide lending unlocks even greater flexibility for investors seeking to diversify their portfolios.

Get started with our quick online form or give us a call at (866) 407-1599 to speak with an account executive now.