What is the Difference Between a Hard Money & a Soft Money Loan?
There is a lot of confusion associated with hard money and soft money loans, with most of the uncertainty based off of the terms, associated fees, and purposes of these loans. Some people assume that hard money loans are simply cash on hand, while soft money loans are cash on paper. However, that isn’t necessarily true.
Although most lending takes place through traditional banks, sometimes criteria from these institutions are hard for business or an individual to meet. Judicious borrowers and lenders can create their own terms, avoiding the bureaucracy of traditional lending institutions.
With a soft money loan, a borrower goes through the traditional loan route, with the loan fixed with a below-market interest rate. This is the type of loan that has a more extended repayment period. To help you conceptualize a soft money loan, think of a car loan. Typically this is a loan that offers 0% introductory APR for a period, and repayment stretching several years. This is a tradition alone, enacted and certified by traditional lending institutions.
A hard money loan acts like a short-term bridge backed by the value of property versus your creditworthiness. This is a type of loan that you can get from a third-party or private investor. Typically they have a more rigorous repayment schedule and lending criteria. Hard money loans are designed to be shorter, with repayment owed within a few months instead of years. The trade-off is in the form of higher interest rates.
When Should You Get A Hard Money Loan?
Most loans typically require that you demonstrate the ability to repay, with lenders interested in credit scores and available income. Hard money loan takes a different approach – there’s a focus on lending based on the collateral securing the loan, instead of focusing on your ability to repay them. The value of your collateral is much more important than your financial position.
Hard money loans have its place and use. Since you aren’t going to the bureaucratic process of traditional lending, there is speed, with most hard money loans granted in days, sometimes even hours. There is also the benefit of flexibility – you might be able to borrow from an investor who is willing to understand your circumstances, which is entirely different than the large corporations and their stringent policies.
- Beneficial for those who have negative items in the credit report or have gone through foreclosure.
- Typically hard money lenders keep tally of a loan to value ratio, with the maximum being between 50 and 70%.
- Hard money loans make more sense for short-term applications. For example, fix and flip investors can see the benefit of hard money loans – they own property just long enough to increase the value, sell it, and repay the loan.
Wildcat Lending Advantage
Wildcat Lending is your number one source for private money lending. Based in North Texas, Wildcat Lending has several financial solutions including hard money loans and real estate loans. Wildcat Lending is not just for individuals, but also for business identities. To learn more about loan options available to you, contact us