Commercial Hard Money Lenders vs Traditional Lenders
Oct 07, 2016
A borrower's financial and circumstances and commercial real estate financing goals will often determine the use of either a commercial hard money lender or a traditional lender to provide property financing. Here is a comparison between the two lending options.
Borrowing from a Traditional Lender (Conventional Lender or Bank)
Conventional Lenders and Banks receive the bulk of business from borrowers who are looking for commercial real estate financing. This type of lender has a set of guidelines for the property and the borrower to adhere to in order for the bank to be able to provide financing. A few of these requirements include:
- All borrowers who will be a party to the loan must typically have a minimum credit score of 680
- All borrowers owning more than 25% interest in the property must provide a full application package
- The borrower(s) must be able to show between 3-6 months of liquidity to support the loan balance
- Borrower(s) must provide 2-3 years of tax returns, a personal financial statement, copies of current bank statements, a resume, and signed lender specific applications and disclosure documents
- Entities holding title to the property must also provide 2-3, years tax returns, an entity financial statement, entity formation documents and notice of good standing, certification of occupancy, as well as complete the lender's application package and disclosure documents
- Borrower(s) must provide proof of experience in owning and even managing the commercial property
- The Borrower(s) must also provide current rent/lease rolls for the subject property as well as 2 years of operating history (with year-to-date information if applicable).
- The requested loan must typically meet at 1.20-1.25 Debt Coverage Ratio (DCR)
- The Borrower must show adequate property insurance to cover the property and lender from loss
- In regards to commercial purchase or refinance loans, the property must be physically in good standing with no do deferred maintenance.
In addition, each conventional lender may request additional documentation that would be used to satisfy underwriting requirements and the requirements of the secondary market, if the loan will ultimately be pooled and sold in the open market.
Commercial Real Estate borrowers who can fulfill all the lender's requirements and who have the time to complete the loan process choose this route because of conventional lender's ability to provide a competitive interest rate and long-term permanent financing.
Borrowing From a Commercial Hard Money Lenders
Commercial hard money lenders are an alternative way for a borrower to receive the commercial financing they desire. A general misconception is that only borrowers who have bad credit and is desperate for a loan would consider a hard money loan. This is obviously not the whole truth. A more accurate way to characterize commercial hard money loans is that they are easier to qualify for than conventional lender money. Unlike most banks commercial hard money lenders often have significantly less stringent lending requirements. Another major benefit of a commercial private money loan over a conventional loan is the speed with the lender can close. Reduced loan requirements and common sense underwriting creates a more efficient loan process for hard money lenders.
Advantages Over Traditional Loans
- You don’t need a high credit score to qualify
- Limited financial documentation required (if any at all)
- Loan terms are shorter
- No Prepayment Penalty
- Interest-only payments
- Borrowers receive loans much quicker
Why Borrow From Non-Traditional Lenders?
Commercial hard money loans provide a great alternative financing option for borrowers who have time-sensitive lending needs and need to close on a loan quickly. They are also beneficial to those borrowers whose financials or property standing do not meet a conventional lender's strict requirements but are never-the-less worthy borrowers.