The Hard Money Journey: Conventional vs. Hard  Money Loans

 

In a competitive buyers market, it is important to be informed about the advantages different loan forms can provide. Conventional loans are the traditional avenue for home buyers and real estate investors to engage in the housing market. However, hard money loans can be an alternative way with distinctive benefits for real estate investors. With interest rates comparable to conventional loans, now is the time to consider hard money loans in your investment journey.

 

Conventional vs. Hard Money: The Breakdown

• Approval Process:

• Conventional Loans: Conventional loans rely on a mix of a person’s financial history and the property value. Conventional loans take place through financial institutions and thus take longer periods to grant approval. This longer approval process checks personal credit and other financial endeavors before deciding the loan.

• Hard Money Loans: Hard money loans also have an approval process, but are much less stringent than conventional loans. As hard money loans come from private financers, they take less time to approve. Hard money loans rely heavily on the property as collateral, opening up borrowers of a variety of financial backgrounds to secure a loan. This also means that if the loan defaults, the investor secures the property.

• Repayment Period:

• Conventional Loans: The traditional conventional loan usually has a 30-year repayment period. This means that there is typically a single interest rate that borrowers pay over an extended period of time before refinancing a mortgage.

• Hard Money Loans: Hard money repayment periods operate much quicker, with usually a 6-month to a 2-year repayment date. This frees up cash flow for future projects, but also requires the borrower to have a stringent repayment plan. This is one of the most important factors to consider when thinking about qualifications for hard money loans.

• Interest Rates:

• Conventional Loans: Interest rates of conventional loans reflect the long repayment period and stable financing. This means that loans usually hover around a 5-6% interest rate.

• Hard Money Loans: Interest rates for hard money loans reflect the riskier nature of these loans on lenders. However, even though interest rates are higher, they can be competitive with those of a conventional loan. For example, current conventional loans hover around 5.75%, while hard money is around 8.5%. Along with this, borrowers are not required to pay back the loan itself during the repayment period. Only the interest rate is necessary during the loan cycle, while the loan must be paid in full once the loan period is over. This lends more cash flow to those who are flipping homes for a profit or need to delineate cash elsewhere in the home buying process.

• Down Payment

• Conventional Loans: Typically, conventional loans require around a 20% down  payment on a property. However, this is typically not feasible for first-time home buyers. This means that different loan forms will provide a lower down payment requirement (such as an FHA loan), but require private mortgage insurance as well, which can hover around a 1.75% flat rate.

• Hard Money: Hard money loans usually require a down payment of around 30% in order to obtain the property. In some cases, this also means that lenders will take into consideration the ARV, or after repair value, which may adjust the price.

• Uses

• Conventional Loans: Typical traditional loans can qualify for most properties. These are especially favorable to first-time homeowners. Residential and commercial properties qualify for conventional loan forms.

• Hard Money Loans: Hard money loans cover owner-occupied, commercial, and investment properties. Typically, owner-occupied are the safest bet for lenders and easiest for borrowers to acquire. Hard money loans are also great for distressed investment properties as it frees up cash flow for the project during that time.

Consider this an overview of hard money and conventional loans. In many ways, hard money can provide the bridge you need to obtain the property of your dreams. For those considering the benefits of hard money loans, consider lending companies that have years of experience, such as JMJ Funding. No matter what your lending needs, JMJ can help match qualified borrowers with investors to obtain the property borrowers want.