The main difference comes down to how these two types of lenders raise money. Hard money providers fund their loans up front, while crowd funding sites collect money from individual investors.This has an impact on the speed at which borrowers can receive funding.
These two lending options became popular as a result of the 2008 financial crisis. New regulations and underwriting guidelines made it increasingly difficult for even high quality borrowers to get mortgages from banks. Hard money lenders, previously considered a last ditch option, began to appeal to many real-estate investors. This is because hard money loans are asset based, leading to easier and faster underwriting and approval process. Hard money loans can be very expensive however, which increased the appeal of crowd funding sites.
Crowdfunding came onto the scene in 2013, potential borrowers use crowdfunding platforms to solicit funds from accredited investors over the internet. These investors meet a certain income criteria and have a net worth of at least a million dollars. Loans from crowd funding websites can be secured or unsecured with personal collateral. Crowdfunding advocates claim the process offers the same speed and efficiency as hard money lending at a considerably lower cost. Proponents claim that a loan secured on a crowd funding site can be 300-600 basis points less expensive than a hard money loan. The terms of each loan secured on a crowd funding website can vary depending on the borrower, making it hard to generalize about the cost of these loans. The supposed speed of these websites is also questionable. The time before a loan is fully funded depends on the willingness of individual investors. This can create a significant lag between when a loan is approved a when a borrower actually receives the money.
Hard money lenders differ from crowdfunding sites in that their loans are fully funded by private groups or individuals. Hard money lenders consider the specific property being financed, the total interest they can charge for each loan and the advance rate on the loan itself. The advance rate is often expressed as a loan to value ratio and it is simply a percentage of the underlying properties total value. This underlying property value usually determines the amount a hard money lender is wiling to lend. Generally hard money is a more expensive option than crowdfunding, with interest rates ranging from 7 to 18. This is in addition to origination fees which can range from 2 to 7 percent of the total loan amount.
The main difference between these two financing sources is the way in which they raise money, however both of them offer a simplified and easier process when compared to traditional banks. Hard money lenders use a simplified asset based underwriting process, allowing them to approve loans faster. Crowdfunding sites use the internet to connect borrowers with potential investors. Although crowdfunding sites can offer fast approval of loans it may take a considerable time before a loan is fully funded.
Generally hard money loans are more expensive than loans secured on crowd funding websites. But hard money loans once approved, are fully funded, and borrowers wont need to wait for individual investors. Even with the expense, hard money lenders remain a viable option if you need money quickly.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.