Hard Money Loans vs a Bank Loan. What's the Difference?
Sep 28, 2016
An explanation of a bank loan is typically not needed for someone considering a loan from a commercial hard money lender. Nevertheless, by outlining the basic lending practices of banks, it is easier to understand how commercial hard money lenders loan money to borrowers.
Basics of a Bank Loan
While there are other criteria’s, the foundation of bank´s lender/borrower contract is the premise that the borrower has the means to generate the required income to repay the loan. This essentially means that the primary interest of a bank during the evaluation process of your ability to repay the loan is their income, not collateral. For a bank loan, a borrower must provide proof of employment, tax returns, and other financial statements.
Commercial hard money lenders do not require that kind of information.
Commercial Hard Money Lending Simplified
Rather than consider a person´s past, present and potential earnings, hard money lenders do not require information regarding a person’s earning power. Instead, commercial hard money lenders look only at the value of the property the future borrower wants to purchase or refinance.
In other words, the value of the property that the potential borrower wants to purchase or refinance acts as the collateral. It is the value of that collateral that hard money lenders evaluate. Earning power versus collateral is the primary difference between bank loans and commercial hard money loans.
This difference has one major implication for borrowers. More often than not, the following statement is representative of commercial hard money loans:
Commercial Hard Money Lenders do require protection in case the borrower defaults.
Since people borrowing from commercial hard money lenders are not required to provide proof of the ability to repay the loan with their income, the borrower must front a higher percentage of the total property value in order to secure the loan.
Hard money lenders — almost all lenders in fact — require protection in case the borrower defaults on a loan. By only loaning a sum equal to a portion of the total value of the property, the hard money lenders ensure that they have the ability to recuperate their losses in case of a borrower´s default.
This is called a loan-to-value ratio (LTV).
Other Generalities with Respect to Hard Money Lenders
- Hard money loans are typically short term - Hard money loans do not typically exceed more than 3 years. In fact, most of them have much shorter terms, 1- 3 years in many cases.
- Bank loans profit on interest – Banks do long-term loans and earn a profit by charging interest month after month, year after year, decade after decade. Since hard money loans are typically short-term loans, in order for the lender to earn a profit, they generally charge higher interest rates than banks
Riverdale Funding: A Commercial Hard Money Lender That Can Help You
If you’re considering a hard money loan, contact Riverdale Funding. We are a leading commercial hard money lender with over 35 years’ experience. At Riverdale Funding we work exclusively with commercial properties in the United States. We clearly outline which types of properties will qualify you for a loan and in what states on our website.