Hard Money vs "Soft" Hard Money Loans

A hard money loan is essentially a way of borrowing money without having to go to a conventional lender or bank. This type of loan is backed by an investor or individuals who are loaning you money based off of the property that you are using as collateral. These loans typically have a quick turnaround time to close, which allows a real estate investor to be competitive when putting in offers against “all cash” buyers. And they can be used on residential investment properties, such as single-family homes, as well as commercial properties. Hard money is generally for real estate investors on non-owner-occupied properties, not homeowners.

What Is A Hard Money Loan?

Hard money is a loan for a project that can last anywhere from a few months to a few years. In essence, these loans are, generally, short-term loans.  Interestingly, “hard” money loans are the easiest loans to qualify for, but they are called “hard” because, in the truest sense of hard money, the lender only looks at the underlying “hard” asset, being the property that is collateral on the loan.  Also, because they are the easiest to qualify for, the interest rates and fees are high on a hard money loan, often making the terms “hard to swallow.”

In the truest sense of hard money, the lender does not rely on the borrower’s creditworthiness, as they are less concerned if they have to foreclose on the property and sell it themselves.   There are varying degrees of hard money lenders though and some have credit or personal asset requirements of the borrowers. Also, some hard money lenders will lend repair money for “fix-and-flip” projects to investors and others will not.

Anyone who has obtained a conventional loan knows that they take several weeks to close and require extensive documentation from the borrower.  They also require a property as collateral that is in good, i.e., livable condition with working electricity, water, no missing fixtures or flooring, no major issues with the roof, no broken windows, etc.; and many properties that will make a profit as fix-and-flips do not meet these requirements.

Therefore, if a loan is needed quickly to meet contract deadlines for the purchase, if the borrower’s income on taxes does not meet traditional loan debt-to-income ratios, or if the property is not in livable condition, then hard money may be an option.

Also, some hard money lenders may lend 100% of the purchase price plus 100% of the repairs, as long as that loan amount does not exceed a certain percentage of the “after repair value” (ARV)  of the property, which is often set at 65 or 70 percent. So, if that ARV threshold is not met, you would still need to put in cash at purchase to meet that ratio. Additionally, hard money lenders might lend to borrowers with low credit scores, if they have experience as real estate investors.

Because hard money lenders have the fewest requirements, they are the most expensive.  Generally, the interest rates on hard money loans are between 12 to 16%, and the origination fees are often 3 to 5%. There are other closing costs to be considered as well.  The higher rates and fees will mean less profit for the real estate investor in the end but can be a good option for real estate investors if the “deal” is right and hard money is the best fit for that particular borrower.

Did you know there are “Soft” Hard Money Loans?

“Soft” Hard Money lenders have cheaper sources of funds than hard money lenders and usually require a down payment from the borrower (otherwise known as “skin it the game”), so they are able to lend money to real estate lenders cheaper than hard money, which means more profit for the real estate investor in the end.  It varies, but on a loan of $300,000 a “soft” hard money loan can often be anywhere from $7,500 to $10,000 cheaper than hard money.

Like hard money lenders, “soft” hard money lenders can close quickly (often in one week or less), have fewer documentation requirements than conventional lenders or banks and easier income underwriting than traditional lenders as well.  “Soft” hard money lenders will also lend on properties that are not currently in “livable” condition and are going to be fixed-and-flipped or fixed-and-refinanced to be held as a rental. “Soft” hard money lenders will also lend money for repairs if desired and are lending to real estate investors on non-owner occupied properties, not residential homeowners.

Typically, a “soft” hard money lender will require the borrower to put down 10 percent of the purchase price (plus 10% of the repairs if the borrower wants to borrow the other 90 percent) from the lender. And, the loan amount will need to be no more than 75 percent of the ARV  appraisal that the lender will obtain. The “soft” hard money lender will also typically look for the borrower to have good credit, meaning a mid-credit score of around 680 or higher. If the borrower does not meet the credit requirements, the lender may consider a qualifying cosigner or additional down payment.

Overall, a hard money loan or a “soft” hard money loan can be extremely helpful, depending on your project. We suggest doing your due diligence and weighing your options. Look at interest rates, fees, time, and qualification standards before pursuing any loan.  And, if you have questions about specific loan types, be sure to reach out to a lender  to talk to a professional for advice.

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