Hard money loans versus traditional bank loans
Hard money and traditional loans are similar, yet very different. Hard money loans are tools used for buying property. These loans are given out by private lenders. Because there is no standard set of guidelines for hard money loans, each loan has different terms. It’s common for hard money lenders to offer different terms and interest rates for the same type of investment, to different real estate investors. In contrast to traditional loans, hard money loans have short repayment periods and higher interest rates. Compared to conventional loans, they are much easier to qualify for, and to be approved for.
- Hard money lenders ignore bad credit, bankruptcies, or other issues that would normally prevent you from getting a traditional mortgage.
- Hard money lenders care about the value of your real estate property. Hard money lenders are collateral focused, due to the nature of the loan. They care exclusively about whether the collateral can be liquidated to cover the loan amount.
- Traditional loans focus on your credit rating and capability of repaying the loan based on income.
Most hard money lenders will not give you money to purchase a primary residence, whereas traditional lenders will. Traditional lenders look at your income, expenses, and debt to income ratio in order to make sure you can repay the loan. In addition, traditional lenders have to be licensed by their state authorities. There are federal tests and licensing requirements, in addition to state tests. It’s an expensive process. In contrast, hard money lenders don’t face such requirements.