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Hard Money vs Soft Money: What’s the Difference?

As real estate investment has taken off and more people are looking to bridge into this lucrative market, there are some decisions that each borrower must make. When looking to secure a loan, you have to both look at your own financial history and look to future goals to see what type of loan will best satisfy your needs. Hard money and soft money loans are both ways to invest in real estate, yet have different variables that accompany each type of loan. Below you will find an outline of both loan types and how to decide which may be best for your investment purposes.


Soft Money, What Is It?


Soft money loans are secured by property, but are similar to traditional lending forms as they look at the borrower’s down payment, credit history, and income. Soft money loans also look at the property’s loan-to-value ratio to factor into lending opportunities for borrowers. Like a conventional loan, they are paid back over longer periods of time (sometimes up to 30 years). However, they are often secured quicker than a traditional loan, normally closing within 2 to 3 weeks.


Hard Money, What Is It?


Hard money loans are acquired from private investors that rely on property as collateral, rather than credit. Lenders look at the loan-to-value ratio of the property, along with how much of a down payment a borrower puts down on the property. For commercial properties, the range for a down payment is typically around 30-40%, with the value dropping for private property at around 25-30%. Since lenders do not rely on credit history, hard money loans can be acquired much quicker than conventional loans, making it an attractive option for those looking to flip houses or make a profit off of real estate investments.


Hard vs. Soft, Which Should I Choose?


Making an informed decision about which loan form is critical to success in real estate. Both options provide several benefits and drawbacks, and knowing which one is best for your situation is the most important factor. Hard and soft money loans differ on three main factors: rates, credit, and length. Knowing the difference can help differentiate between which may work best for you.


  • Rates: Rates depend on how long a borrower has, and the varied risk an investor takes with these financial decisions. Due to the higher risk lenders take investing with hard money, rates are higher to reflect the risk. Soft money loans will often have lower rates because there is a longer period of time to pay back. All rates are chosen by the lender, with hard money loans normally starting around 7%.


  • Credit: Hard money loans rely on property value for a borrower to secure the loan. This allows for borrowers to quickly secure the loan, while also leading to higher rates. Soft money loans, on the other hand, are more like traditional loans in that they check a borrower’s credit history before granting the loan. This is something to consider when choosing between the two forms of loans.


  • Length: Repayment for soft money loans mirrors that of traditional loan forms, sometimes occurring between fifteen to thirty years. This makes it good for private property investment. Hard money loan repayment plans occur much quicker, often on a timeline between one to two years. This makes it ideal for those trying their hand in home flipping.


Bottom Line:


The difference between soft and hard money loans revolves around three critical factors: rates, credit history, and length of loan repayment. Knowing which factors apply to your financial goals can help you better secure a loan, while also financially planning for the future. For those looking for a long time property investment with extended terms, soft money is the choice for you. However, if you are looking for a quick cash flow that does not require personal assets, hard money is the correct route. For those looking to house flip or secure property quickly, hard money is the loan form in which to apply.

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