hard money vs soft money loans

Hard Money vs Soft Money Loans: What’s the Difference?

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February 12, 2024

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Real estate investing requires you to have reliable options for a steady flow of capital. For that reason, many home flippers turn to loans, but the conventional lending process can create costly bottlenecks and missed opportunities.

Can hard money loans be a better alternative? Find out how to decide between hard money vs. soft money loans in real estate.

Hard Money vs. Soft Money Loans: Key Similarities and Differences

Soft money and hard money loans are both solid options, depending on your situation. Consider the distinctions.

How Hard Money Loans Work

The “hard” part of a hard money loan has nothing to do with the difficulty of accessing funding. Instead, it refers to the fact that you’re securing the loan with an asset, usually the piece of real estate you’re purchasing. However, you can use other property as collateral as well.

Also, hard money lenders are not conventional banks and credit unions. Rather, these are private lending companies or even individuals who extend flexible, customized loans.

How Soft Money Loans Work

A soft money loan is what most people view as a conventional loan. A traditional bank mortgage is one of the most common types of soft money loans.

To get a soft money loan, you’ll go through an exhaustive process to qualify, as the lender wants to do a deep dive into your credit score and history. The lender will also give more weight to your debt-to-income ratio. While you can use collateral to secure this financing, your circumstances are going to play a much larger role in getting approval.

How Hard Money and Soft Money Loans Are Similar

Whether you are getting a hard money or soft money loan, expect to go through an underwriting process. This is how the lending company qualifies you and reduces its risk.

You’ll need documentation to prove your identity, and the lenders will want to know about the property you’re buying, find out how you intend to use the money, and review your business plan. You might also have to pay a down payment with either loan type.

It’s also important to work with a reliable lender, no matter which loan type you go with. Not every bank is a friendly and supportive team that wants to help you achieve your goals with a soft money loan. Likewise, you have to carefully pick a private lender with a solid track record to get a good hard money loan.

How Soft and Hard Money Loans Are Different

Hard money loans are usually for shorter-term projects, often less than a year. Soft money loans will extend for at least a year but usually have terms for much longer.

Due to their short-term nature and higher risk, hard money loans will have higher fees and rates. However, the terms for hard money loans are much more variable and customizable to the borrower. Soft money lenders stick to strict guidelines that don’t accommodate individual circumstances.

Another area of flexibility with hard money lending is the property type and loan amount. Soft money loans often have higher minimum amounts and require a property to be in good condition. With hard money financing, you can purchase any kind of fixer-upper and even dwell in the property as you fix it, which may not be an option with traditional lenders. This flexibility is why private lending is experiencing a boom among small business owners.

Also, a hard money lender approves and disburses funds more rapidly. Borrowers can get the money within days or a couple of weeks. Soft money lenders will take a couple of weeks just to close, and it can be months before you get your capital.

Hard Debt vs. Soft Debt: Pros and Cons

Before deciding on hard debt vs. soft debt, weigh the advantages of each.

The Advantages of Hard Money Loans

When you need to move quickly to flip a house, you’re usually better off with a hard money loan. Especially when a property needs serious rehabbing, you’re going to get much less pushback and more cooperation.

Also, if your credit is less than stellar, you’re going to have an easier time getting a hard money loan. You likely won’t have to worry about mortgage insurance and can more readily access 100% funding. You also have more flexibility in who you can get the down payment from.

When Hard Debt Isn’t a Good Idea

Hard money isn’t right for everyone. Calculate your budget to verify that you can repay the loan in a reasonable amount of time. Because of higher interest rates, taking too long to pay can be more costly if your plan for quickly flipping a property or turning it into a rental isn’t workable.

The Benefits of a Conventional Loan

A conventional loan helps you build your credit and offers a longer repayment schedule at a lower interest rate. If you have a good credit score and are looking at a property as a long-term investment to buy and hold instead of a quick fix and flip, you may be better off going the traditional route. Keep in mind that you can still get a conventional loan with a local private lender that is more flexible than a bank.

Reasons Not To Use a Soft Money Loan

If you have a good plan for a quick flip, you might hesitate to get a soft money loan. You’ll have to wait longer to get the funds and could even have to put up some of your assets as collateral.

Soft money loans also slow you down if your credit isn’t above average yet. Lenders usually require you to have more cash in reserve in these cases, impeding your progress. Since interest rates and rejections for conventional loans are up, the additional time and effort may not be worth it, even if you have very good credit.

Associates Home Loan: Your Source for Funding You Need

Fortunately, at Associates Home Loan, you can access both conforming and non-conforming loans. We understand which circumstances call for which type of loan and can help you decide.

If you want to simplify the process of weighing hard money vs. soft money loans, talk to our team. We’d be happy to help you find the funding that’s right for you.

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