Are you looking for options real estate investment financing? One man’s meat is another man’s poison. What works for a friend of yours may not necessarily work for you. It is therefore wise to consider all available options, compare pros and cons and then settle on the option that best suits your objectives.
Start by learning the difference between hard money and soft money lenders. While both hard and soft money loans can be profitable, the repayment interests, terms of engagement and duration of loans are different. Let us start by defining both loan types.
Defining the two types of loans
Just as the name suggests, a soft money loan is one whose interest rate is soft. Repayment interest rates are actually lower than the ordinary market rates. Perhaps the best example of a soft money loan is a car loan. This is a loan whose period is long and that involves small interest rates and whose duration can be as long as 3-5 years.
On the other hand, a hard money loan is a short-term type of loan. These are meant for bridging a gap in an investment and is often secured against an asset. A good example of a hard money loan is one given by private lenders to investors of real estate projects. You would typically repay a hard money loan in 6-12 months.
In understanding the differences, let us use the following differentiating factors.
Credit score for loan eligibility
Lenders of soft money loans are usually established financial institutions such as banks, credit unions and microfinance companies. You will have to prove your good financial standing to qualify. These institutions will require your financial statements, borrowing history and credit score to determine your eligibility.
Interest rates of loans
Hard money loans are so called because of the somewhat hard terms of repayment. Interest rates can be as high as 10-15% on the loaned amount. Interestingly, interest rates on soft money loans can be as small as 1-3%. Hard money interest are so high because of the high risks of funding the projects.
Duration of loans
Lenders of hard money loans need to recover their returns on investments quickly. They cannot stay for too long in the risky and murky waters. For soft money loans, the risks involved are smaller, and lenders can afford to advance money to borrowers on the long-term.
Flexibility of loan type
Hard money lenders only lend money when an investment project is lucrative or sensibly viable. For this reason, you have some room for negotiation. In some cases, you will deal with a single private individual who can better listen to you than an established corporation such as a bank.
Speed of loan approval
Traditionally, soft money lenders such as banks have to follow innumerable procedures. This regulation makes your wait for a soft money loan longer. That is not the case with hard money loans. Some alternative lenders can approve your loan in a matter of days.
Assets as prerequisites of approval
With an asset such as a real estate property or a substantial down payment, you can secure a hard money loan fast. Otherwise you can qualify for a soft money loan with no down payment or an asset to use as collateral.