Hard money loans vs. soft money loans: what is the difference?

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“Soft money loan” term refers to conventional loans that mortgage companies or banks give.
The term “hard money” is mainly used by real estate investors who look for quick financing to purchase a property or for rehab purposes. Hard money loans are given by companies, or private individuals called private lenders. For example, the LBC Capital is a direct lender providing fast financing to real estate investors of up to 25 million and coverage of up to 85% LTV.
So, there are three main differences between hard money loans and soft money loans: rates, loan terms, and credit.

Credit
Hard money loans are secured by the value of the borrower’s property and ARV (After Repair Value). Soft money loans are also secured by the real property’s value and depend on the borrower’s credit score (min is 580), income, and down payments. The higher the credit score, the lower the interest rate and the repayment period you can get. However, soft money loans usually refer to conventional loans made by banks or mortgage companies.
As hard money loans depend mainly on the quality of the property, not on the credit checks, you can get access to hard money much quicker than soft money. Thus, with LBC Capital, you don’t need to wait weeks or even months for approval; we approve your loan within 24 hours.

Rates
Rates for hard money loans are usually higher than the rates for soft money loans, starting with 8-9%. It’s caused by the terms of which you get the money. The short terms are always a risk for a lender.

Loan terms
The usual terms for soft money loans are from 15 to 30 years (that’s why the interest rates are smaller) and for hard money from 6 months to 2 years. That’s why hard money loans are a perfect solution for real estate investors who need to seek financial support in the shortest terms.

What are the pros and cons of soft money loans?
Advantages:
soft money loan companies offer lower interest rates due to borrower’s credit score
soft money loans can cover up to 90% of LTV
soft money loans have a more flexible repayment period due to the borrower’s credit score

Disadvantages:
you cannot get approved for a soft money loan with a low credit score
long loan closing time
despite having a good credit score, the borrower must show he has money for 3-6 months of the loan repayment

What are the pros and cons of hard money loans?
Advantages:
hard money loans are easier to get, the credit score isn’t taken into account, but the property is
hard money loans have to be closed much faster
hard money lenders don’t require to have proof of loan repayments in reserve

Disadvantages:
Hard money loans are short-term; subsequently, the interest rate may be higher. However, it shouldn’t affect you much if you repay the loan in time.

LBC Capital has been a trusted lender since 2003 that provides hard money loans from $50 000 to $25 million with the same day underwriting. If you still have any questions, call our loan adviser for free assistance today at (818) 761-7234.

Check our recent article on what happens if you default on a hard money loan here.

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