Table of Contents
- Let’s review these differences further and also understand how they work
- Know the Differences between Hard Money Loans vs. Soft Money Loans before Choosing One
27% of small businesses in the United States don’t have access to business funding. So, what are the options left for them to survive?
If you’re an investor in the real estate industry, you need to know the alternative ways through which you can get funding for your business. One of the options you’ve is choosing either hard money or soft money. But first, you need to understand the differences between hard money and soft money to choose the right funding.
In the real estate world, hard money vs soft money is all about the fees, loan terms and interest rates. While hard money loans are based on the asset and are short term, soft money loans are borrower based and long term.
Let’s review these differences further and also understand how they work
Definition of Hard Money
Hard money loans are not based on a borrower but an asset. The asset, which is an investment in real estate, is used to secure the loan.
Most hard money lenders are private companies or individuals and not traditional lenders like banks.
Definition of Soft Money
Unlike hard money loans, soft money loans are based on the borrower’s credit rating or credit score, ability to repay the loan, and their debt to income ratio. This loan can be funded by traditional lenders like banks who, in turn, sell it to government agencies like Freddie Mac or Fannie May.
Hard Money vs Soft Money in Real Estate
In real estate, hard money loans attract very high fees and have a short duration. Also, the terms of borrowing are different as per the agreement between a particular lender and borrower.
With this type of loan, a lender receives a monthly interest until the loan is paid in full. The lender will also charge a fee to process the loan. The property which the borrower plans to purchase with the money backs up the loan.
Soft money is the reverse of hard money. It’s easy to get and the interest rates are very low.
You will need some property as collateral should you default in payments. A soft money loan is easy to get because the lender focuses more on a borrower’s credit score.
The main difference here’s that hard money loans are used to fund short term investments, while soft money loans are used to fund long term investments.
Hard Money and Soft Money Lending
When applying for a hard money loan, you should also understand that they have a more strict repayment schedule and lending criteria. This is because they are short term, and you will have to pay them back within a period of three to six months, depending on the lender.
On the other hand, soft money loans are more common. An excellent example is the car loan. They’ve a 2-7 years repayment period depending on the lender, and this makes them easy to manage. Applying for soft money loans will require the bank to check your credit rating, bank statements, and debt to income ratio very carefully.
Why Hard Money Loans Are Easy to Process
These loans are good because they are very fast to process. The lender is not very interested in a borrower’s current financial status, and therefore, they only carry out a little background check. In most cases, the lender is more focused on the collateral.
The agreements of hard money loans are not standardized; they’re flexible and will depend on the lender. They can be modified to accommodate both the lender and the borrower’s ability to repay the loan.
Hard money loans are quite flexible because you do not bargain the terms with a big corporation but an individual, who can understand your loan needs and situation. This is something that you cannot get from traditional lenders and other giant entities who have defined loan terms and agreements.
The Pros and Cons of Hard Money Loans
Some of the main advantages of hard money loans are
- Quick Process
- You can get up to 100% of the purchase fee
- You do not need a down payment
- Flexible agreement
The cons include:
- Higher interest rates
- Risky to lenders
- Attract an origination fee
- Short term
- You can lose the property
It is also important to note that, if hard money loans are not paid back on time, they may attract a higher interest rate than before.
Pros and Cons of Soft Money Loans
Here are some of the reasons why you should consider taking a soft money loan:
- They have a flexible repayment schedule and this will depend on your credit score
- The loan can help in repairing and building your credit
- They can fund at least 90 of the property’s LTV
- Lower interest rates
The disadvantages of Soft money loans include:
- No approval with bad credit
- They have a longer closing time
- You may need to prove that you have money to cover at least three to six month payment
- You will turn over a lot of assets to serve as collateral
With all this in mind, you can now easily choose the type of loan that best suits you and your real estate business. Always shop around and settle for the lender who offers you better rates and terms.
Know the Differences between Hard Money Loans vs. Soft Money Loans before Choosing One
When it comes to hard money vs soft money loans, you need to understand what each loan has to offer.
If you’re looking for a short term investment and can pay high interest rates, then you can consider hard money loans.
To read more, explore other articles on our website.