The Difference Between a Hard Money Loan and a Soft Money Loan
Both hard money and soft money loans exist. What’s the difference? Both can be profitable. It’s critical to understand the differences between each of them.
This blog post is here to help you understand differences and similarities between hard money loans and soft money loans. Both types of loans can be profitable depending on your usage. It’s important to understand the fundamental distinctions of each of the types of loans.
What’s a soft money loan
Soft money loans are traditional loan with a below-market interest rate. This is a type of loan which has a longer repayment period. Car loans are an example of soft money loans. Some car loans, which are an example of soft loans, have 0% APR(for a period of time), and repayment periods which can range from 2-6 years. Soft money loans are usually provided by certified lending institutions.
What’s a hard money loan
Hard money loans are short term bridge loans which are backed by an asset – such as a property. The credit worthiness of the borrower isn’t as important in this case. These types of loans are funded by private investors, and have rigid rules and lending criteria. Hard money loans are designed to be shorter, and are usually repaid in 3-12 months.
Similarities between Hard and Soft money loans
Both kinds of loans have repayment terms, and eligibility criteria. Both have rules that protect the investment if the deal goes bad.
Differences between hard and soft money loans
One of the biggest differences is your credit score. Soft money loans require some asset as collateral, in addition to your credit score being important. To qualify, you must have a credit score above 580. In addition, the higher the credit score – the lower your interest rate and longer your repayment period.
With hard money loans, your credit score isn’t important. Hard money lenders, like Zogby, focus on the quality of the asset(property), rather than your credit quality. You can get funding for a hard money loan very fast, assuming you have the necessary documents to prove the asset is worth it. Here are the pros and cons of each investment loan.
Pros and Cons of Soft Money Loans
- soft money loans have lower interest rates depending on your credit score
- soft money loans can fund up to 90-95% of the property’s LTV
- when you take a soft money loan, it becomes part of your credit history, and can help rebuild your credit
- soft money loans have a flexible payment schedule
- you can’t get approved with bad credit
- you have to give up assets as collateral for the loan
- you have to prove you have 3-6 months worth of loan payments in reserve, in addition to having good credit
- soft money loans have long closing times
Pro’s and Cons of Hard Money Loans
- easier to get since your credit score/history is ignored
- easier to achieve your goals with a hard money loan, even if you have poor / bad credit
- hard money loans don’t require a down payment, nor do they require proof of loan payments
- you can close in 3-5 days
- the loans are short term, and interest rates are higher
Hard money loans are the best way to go in real estate. They allow you to move fast and quick, and are suitable for flipping properties, constructing new properties, or as bridge loans for transactions. These types of projects typically require you to borrow cash quickly for a very short time. Once you understand the critical differences between hard and soft money loans, you will realize that hard money loans are better for real estate investors.