When you think about this question, the answer is relatively simple. The ability to process loan applications with such great efficiency while using a hard Money Lender comes down to three main reasons: One, they are familiar with the lending area. Two, the organization is structured differently than institutional lenders. Three, the underwriting principles used by direct capital lenders are different. A fourth could be less regulation, both internal and external. But, this is less ubiquitous and dependent on the location of the loans made.
Today, many private lenders focus on city, state, and regional lending boundaries. This allows them the ability to know the markets very well. A thorough understanding of foreclosures, new construction, and market trends provides a comprehensive view of the lending area. With this understanding, more often than not they will know almost immediately if the loan is something they are interested in, something they will look at, or if it is just out of their scope at the present time.
Banks, insurance company portfolios, and other institutional lenders have intricate corporate structures consisting of many tiers. These include but are not limited to loan originators, underwriters, appraisers, auditors, and loan committees. It’s easily possible that more than ten people will be scrutinizing different aspects of each application. There may be some efficiencies that come from specialization in each area, but to get everyone coordinated and up to speed on the idiosyncrasies of each loan takes time. For many hard money lenders this not the case because offices are small. The person you talk to regarding the loan request is also in many cases the person who has the final call on dispersing the funds. The local knowledge combined with one to three people evaluating each loan’s circumstances drastically reduces the time to a loan commitment.
Finally, underwriting standards at institutional lenders and hard money lenders are vastly different, both in term of what the lender looks at and the priory of the metric. Banks are concerned with debt service coverage ratios, net operating income, loan to value ratios, previous tax returns, previous income statement, vacancy rates, etc. Each private capital lender is different, but essentially they base loan decisions on a limited number of measures: loan to value, current property value, and financial stability of the borrower. With these simple metrics, combined with local market trends, borrowers can be assessed and delivered appropriate term sheets many times faster than going to traditional lending sources.
When you combine market knowledge, business structure, and lending standard, hard money lenders are able to get funds to real estate investors when they come across time sensitive deals and often create lasting relationships with lenders. Because of the lenders blanketed insight in to the details of individual markets, theses loans can also be tailored to each situation as it arises, which, in a best case scenario, creates a win-win situation for all parties involved.