HARD MONEY VS CONVENTIONAL FINANCING?

When it comes to purchasing properties, most real estate investors don't start off with enough cash to fund their entire purchase. However, that's not the only reason investors leverage financing to acquire properties. Many investors have plenty of capital to fund their deals 100% -- so why don't they? One word... leverage! No one wants all their capital tied up in an investment, they want to be able to stay liquid and use their cash towards other expenses and use financing to cover the majority of the loan costs.

When it comes time to plan your next investment, you can choose between a number of lending options such as private lenders (also called hard money lenders), or conventional financing (mortgage companies and banks).

There can be some confusion when it comes to what these terms really mean. To help simplify, were diving into the basics of each financing option and outlining key details to help make it easier for you to find the one that best suits your needs.


WHAT IS PRIVATE MONEY (AKA HARD MONEY) LENDING?

Private money loans, also known as hard money loans, are short-term loans secured by real estate, typically extending for around 6-12 months.. Simply put, they lend based on the value of the asset. However, you can also find hard money lenders who, in addition to short-term financing, offer long-term options for those looking to generate cash flow with stabilized rental properties. You can see these in 5, 7, or 10/1 interest-only ARMs. Hard money loans are for non-owner occupies properties making it great for investors because they typically close faster and have minimal documentation requirements.

Oh! And what investors love about hard money loans are the interest-only payments. This often makes it more lucrative to cash flow because unlike conventional financing, you're not having to pay principal in addition to the interest. 

So how much money can private lenders actually lend to the borrowers you might ask? That amount is primarily based on the subject property's value. This is where the term Loan-to-Value" aka LTV comes into play. This is the outstanding debt on a real property divided by the fair market property value. Most hard money lenders will finance anywhere from 65-80% LTV. Here's an example:

Lets say you have a property and the:

Fair Market Value = $500,000

Investor is putting down $100,000

Outstanding debt now = $400,000

In this situation, if the lender is providing $400,000 on this $500,000 property, they are lending 80% LTV.

Unlike conventional lending, hard money lenders main concern isn't the borrowers credit and debt-to-income ratio. Rather, the concern typically lies with the property's value. Don't get us wrong: credit is still important, but its not weighted as much in this case as people think. To give an example, borrowers who've gone through a recent short sale or foreclosure and cant obtain conventional financing can still get a private money loan if the property that's being used as collateral has enough equity.

Still have questions? Here's a breakdown:

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WHAT IS CONVENTIONAL FINANCING?

Conventional financing, such as banks and mortgage companies, are structured based on the assumption that the property is a primary or secondary owner-occupied residence. As a result, these are long-term loans that get repaid typically over a 15- or 30-year period. Conventional lending assesses debt-to-income ratio, employment history, W-2s and FICO score. To simplify, they are lending the money based on you, the creditworthiness of the borrower.

Conventional loans are more popular with the traditional homebuyer than they are with investors. However, a benefit of these loans is that they offer lower interest rates when compared to private money sometimes making it a better choice for some investors.

All in all, they're not as flexible as investors would like. If you don't have a great credit score or an income that fits the lender's exact guidelines, it can be difficult to qualify for a traditional mortgage. Furthermore, these institutions have a maximum number of loans that a borrower can have, thus causing investors in the rental market to max out and not qualify for additional loans.


WHEN YOU'RE READY TO FINANCE, CIVIC IS HERE

CIVIC Financial Services is a private money lender that provides flexibility and fast access to short- and long-term capital based on borrower experience, a deals merits, and the exit strategy. CIVIC generally doesn't use a one-size-fits-all approach and instead analyzes deals on a case-by-case basis.

The loan-to-value (LTV) ratios can be from 75-80%, depending on the property location and condition. Furthermore, all of CIVIC's operations are done in-house, under one roof, which makes the lending process reliable, smoother, and more controlled.

Given CIVICs flexibility for real estate investors, we strive to be great partners in fulfilling your investment goals. Give us a call at 877-472-4842 to discuss financing options. Our private lending experts specialize in assisting investors who acquire real estate investment properties off-market or not. We have programs available to suit various investment strategies, we know that time is of the essence, and we'd love the opportunity to earn your business!

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