Traditional lenders are typically cagey when it comes to lending for fix and flip properties. This is because the properties in question often require extensive remodeling and there’s no set time on when the project will be completed. The entire business model is a bit too speculative for their conservative tastes.
Luckily, hard money lenders follow a 60%-80% loan to value ratio, and they are friendlier for this business than banks. The following are some of the reasons why you should choose a private money lender over a traditional bank:
Credit rating doesn’t matter as much to private lenders
Low credit ratings have locked out many people from getting business financing from traditional lenders. In the conventional setting, your creditworthiness is determined by how well you have repaid your loans in the past, including hard-to-pay student loans, credit card debt, and more. Your debt to income ratio also plays a vital role in informing your intended lender’s decision on whether to loan you the money or not. Many people who would otherwise be able to repay their loans are left out due to banks’ conservative application of these terms. If you’re confident that you can pay back the loan quickly despite having low credit, investing in the help of a private money lender is a far better option.
This is because private loans aren’t concerned with your credit score. Thanks to high interest rates down the line, they can be sure that their investment is protected. If you manage to pay back the loan quickly, it’s a far more lucrative option than going with traditional lenders.
Private lenders process loans quickly
Fix and flip business deals works best in an environment where the demand for houses is higher than the supply. A property that is on sale in such a market will have many interested customers. This is a huge draw for private lenders who can get a return on their loan quickly. If you went to a traditional lender under these circumstances, chances are you will miss your opportunity to procure the house.
Unlike conventional lenders who take time to go through your finances with a fine-tooth comb, hard money lenders do not take as much time. This is because they use the property you buy as collateral.
The main factor that a private money lender considers when loaning you money is the value of the property you want to buy. Once they know the value of the property, they can quickly calculate what they can lend to you. If you are unable to repay your loan, the lender repossesses the property and sells it off to get their money back.
Private money lenders are often more flexible
The fix and flip industry is growing and for good reason, but it is not always straightforward. Sometimes your permits get delayed or you face down a shoddy contractor. In light of these delays, a traditional lender will have established protocols when it comes to lending, processing, and repaying these loans. It is generally tricky for these protocols to be avoided at any point in the borrowing cycle.
To be able to hold on to your property during these possible hiccups, you need a flexible lender. A private money lender is usually an individual or a small investor pool whose loan programs are organized by specialist companies. This simple structure makes it possible for them to offer flexible terms to borrowers at all points in the process.
Choosing a lender
The terms and qualifications of hard money loans vary widely. It is essential for you to check to see which loan program has the conditions that are most favorable for you. Factors such as flexibility and the loan repayment schedule are factors you can consider before borrowing. When you’re ready to start your next project, rely on the experts at GW Private Capital for more information about hard money loans.