Soft Money vs Hard Money: What’s Best for a Loan for Homes?

Real estate is a $6.8 trillion industry worldwide, with the possibility of rising to $8.6 trillion by 2026.

Are you planning to buy a home? Are you short of funds? Don’t worry; you can secure a home with ease, thanks to the multiple mortgage options.

Hard and soft loans are great home loans that you can always turn to whenever you need additional funds for buying a property. But before then, you should understand the differences between the two.

This guide discusses soft money vs hard money to help you choose the best. Read through it to make an informed decision.  

Hard Money Loans

Hard money is an asset-based loan. The loan is based on the value of the property that the borrowers offer as the collateral. If the property is valuable, the borrower gives out the loan irrespective of the borrower’s credit status.

The loans are not offered by financial institutions but rather by private lenders who are also investors. Before giving out the loan, the lenders examine the property that you intend to buy. 

If it’s fully furnished, they determine its value, add up the possible costs of repairs and give a loan based on the current market value. 

People with a poor credit history can qualify provided that they have the collateral. However, the interest rates can be very high because the lenders consider them risky.

These loans’ repayment period is relatively short (3 to 12 months), hence the high-interest rates. The qualification criteria vary from one private investor to another. However, personal taxes, credit history, and employment status are rarely checked.

But if your credit score is excellent, then it would be a great idea to show that to your lender. Your lender can be impressed by your past financial commitment and prioritize your application.

The Pros of Hard Money

If you are willing to use the property as your collateral, the hard money loans would be the best for you. Here are a few benefits that you would enjoy by using this loan:

Fast Application and Approvals

You can get your hard money within 48 hours. This is a great advantage considering that conventional banks can take up to 30 days. You only need to ensure that you meet the minimum requirements to get the money within the shortest period.

Low Credit Scores

Is your credit score below average? Worry not; the lenders do not consider your past loan payment history. They only consider the value of your property and not the credit score.

Easy Fix and Flip Lending

fix and flip property is considered to be outdated. At times, the property can be messy and vacant. Hard money lenders understand how distressed the fix and flip homeowners are, and that’s why they don’t hesitate to lend them.

Soft loan lenders consider the fix and flip loans illegible because they are not inhabited, and that’s why they don’t offer such lending.

No prepayment penalty

Borrowers who finish their projects early get the chance to make early repayments. Most hard money lenders do not charge penalties for the early payments.

The Cons of Hard Money

Now that you know the benefits of hard money, it would also be useful to know the drawbacks. Here are the main barriers:

High-Interest Rates

As mentioned, hard money is considered to be risky. Remember that most borrowers have a poor credit history, hence the riskiness. And since the loans do not have any government or institutional backing, they charge a higher interest rate.

You should confirm the interest rates given by your hard money lender before applying.

Must Provide Down Payment

A down payment is compulsory for most properties, especially the fix and flip buildings. Mostly, the down payment ranges from 15 to 20% of the total value of the property.

The down payment reduces the risk of default and motivates the investors to finish up on the project. Be prepared to provide the down payment which the lenders ask you.

Short Repayment

Hard money is not for you if you need a prolonged repayment period. The repayment period is concise (less than 12 months) compared to what the traditional banks offer.

Soft Money Loans

Soft money is the exact opposite of hard money. Lenders offer the loan according to the borrower’s financial status, employment status, and credit score. These home loans are only offered by financial institutions such as banks, not by private investors.

At times, the soft money lenders may consider the value of your property too. This is true when you ask for large amounts of money or need a more extended repayment period.

The Pros of Soft Money

Soft money loans have some pros, which make them a preferred option among many homebuyers. Here are the main benefits:

Longer Prepayment Period

Soft loans are similar to traditional bank loans. They have an extended repayment period of up to 30 years. The loan repayment time allows you to collect enough money through your newly acquired property. 

Note that some lenders may require borrowers to pay in less than five years, so you should confirm the repayment when applying.

Lower Interest Rates

Financial institutions offer soft loans. Some of these institutions have government backing, hence the lower interest rates. Moreover, the rates are flexible according to the credibility of the borrower.

If your credit score is excellent, you can get the lowest interest rates possible, with a more extended repayment period.


Soft loans are easier to get than hard loans. This is because the number of financial institutions is more than private investors’. The wide array of options makes the search process relatively easy and straightforward.

You can compare the available lenders’ terms and conditions and select the best without being constrained by a particular lender.

The Cons of Soft Money

Nothing is perfect. Soft loans have their drawbacks, which make some people turn to hard loans. Check these drawbacks to know if you can choose them:

Long Application

Soft money loans have a lengthy application when compared to hard loans. On average, the disbursement takes place after 15 working days. That period could be too long if you wanted the money urgently.

Good Credit

You must prove that you have an excellent credit history. If you have applied for other loans before, you should show you repaid them in time. 

Also, the lender must confirm that your income flow is steady and sufficient for the loan repayment.

Soft Money vs Hard Money: Notable Differences

Here is a summary of the main differences between soft and hard money. These differences will guide you in choosing the right loan program for you when buying the property. Check them out:

The Meaning

Hard money refers to asset-based lending, whereby; the borrower must use the property as the security. Soft loans combine the aspects of hard money lending and traditional lending.

Loan Term/Length

Soft money loans have an extended repayment of 15 to 30 years. The repayment length for a hard loan is short and ranges between one month and twelve months.

Interest Rates

The interest rate for hard loans is relatively high compared to soft loans. The rates for hard loans start from 8% wherein that for soft loans may be lower.


You can only borrow a hard money loan when you have a specific use in mind. For instance, real estate investing. You can qualify for a soft money loan even when you don’t provide a specific use.

The Risks

Hard money is quite risky to the lender because people with poor credit score can qualify. The soft loans are less risky because the borrowers are always keen on the credit score scrutiny.


Hard money loans fund the properties in poor conditions (fix and flip) because it’s the security given to them by the borrower. Soft money loans only fund the properties in excellent condition.


Hard money loans have a shorter closing period than soft loans. On average, the hard money loans close in two days, where the soft loans close in up to 14 days.


Less paperwork is required in hard loans, provided that the lender has assessed the property’s condition. The soft loans involve a lot of paperwork before the loan approval.

Choosing the Best Home Loan

Both hard and soft money loans are great for property investing. However, they don’t work the same way, according to the information above. Before you apply for any, review the pros and cons to make the best decision. 

Hard money would be the best for you if your credit score is poor and your property at hand for the collateral. It would also be great if you can repay in a short period.

Soft loans would be great if your credit score is excellent. If you find the process of choosing between the two quite challenging, involve a financial expert to help you. 

Find a Reliable Lender

Whatever decisions you make, you should only get the loan from a reputable lender. The best lender should understand your needs and help you choose between soft money vs hard money. 

Merchant’s Mortgage is a private lender for fix and flip loans, new property loans, and bridge finances. We help real estate investors get the right homes of their dreams through our great financing system.

If you are looking forward to buying a house or repairing your old home, contact us to get advice and handy help too.

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