While hard money lending is a form of private lending, it isn’t offered by banks. Hard money comes from firms comprised of groups of investors who pool their money and lend it out. The firms are managed by licensed fund managers who handle loans on behalf of those investors. So what you really have with hard money is an investment. It is not a banking service.
This distinction is important for a number of reasons. As an investment, hard money lending is not subject to the same rules and regulations banks are governed by. This does not mean that hard money is a wild west scenario. It just means that lenders must follow a separate set of rules.
Banks Lend Out Deposits
The rules are different because funding sources are different. Whereas hard money firms lend out funds that come directly from investors, banks lend out deposits. Banks are also independent financial institutions with fiduciary responsibility toward their depositors. They are essentially middlemen serving both borrowers and depositors at the same time.
Their fiduciary responsibilities require that banks do things a certain way. A full range of rules and regulations cover everything from how interest rates are established to how credit worthiness is determined.
On the other hand, private lenders like Salt Lake City-based Actium Partners, are investors in the hard money space. They do not provide a loan service. Rather, they are investing in projects they hope and expect will return a healthy profit. When a property investor gets a hard money loan to acquire a piece of real estate, the lender is investing in the property as well.
Lenders Have More Freedom and Flexibility
Acting as investors rather than bankers means hard money lenders have more freedom and flexibility. Unlike retail banks, they don’t have to look into a borrower’s credit worthiness to approve a loan. They need make no effort to prove a borrower’s ability to pay.
That is certainly not the case with banks. Retail banks are required by law to turn over every stone in an attempt to prove a borrower’s credit worthiness. That’s why they ask for so much documentation. It is why they run credit checks, verify employment, and do anything else that could help them understand a borrower’s financial position.
The freedom and flexibility afforded to hard money lenders also allows them to be more flexible with downpayments, interest rates, loan terms, and more. Private lenders can more or less customize a hard money loan to the individual borrower.
More Options for Default
Not being banks gives hard money lenders the freedom to take on more risky loans. Fortunately, federal and state laws also give hard money lenders more options for addressing default. They need those options to protect themselves against steep losses due to borrower default.
When a consumer fails to make mortgage payments, his bank can initiate the foreclosure process. Foreclosure costs time and money. By the time it is completed, which can take 12 months or longer, the lender almost always loses money.
Things are different with hard money. Hard money lenders can move more quickly when borrowers default. Rest assured they do. They can liquidate a borrower’s assets to repay the outstanding loan balance and do so quickly enough to avoid substantial losses.
There is a lot more to be said on this topic. Time and space don’t permit going any further. So for now, it’s enough to know that hard money is really an investment. It is not a banking service. Investors lend with the expectation of earning a certain return. They will not do it if the return potentia