A major difference between a hard and soft money lender is that hard money is typically funded for short-term investments whereas soft money is better for long-term investments. To have a better understanding of the two, here are definitions of the two individually:
Hard Money is a commercial loan issued by hard money lenders. These hard money lenders will design a loan based on the after repair value (ARV) of a property. It’s not so much based on the credit score or financial state of the borrower.
Soft Money issues loans by commercial banks and are based on two things: your credit score and your income (this shows if you’re capable of making your monthly payments).
Here are some key differences between the two:
- Funding for homes in poor condition
- Higher Interest rates
- Funding for short-term investments
- Closing as soon as 2 days
- No-owner occupied properties
- Less paperwork
- Less government regulation
- Flexible in structuring loans
- Funding for homes in good condition
- Lower interest rates
- Funding for long-term investments
- Closing as soon as 30 days
- Can be occupied by owner
- More paperwork and procedures
- More government regulation
- Strict standards for loan structures
Starting The Borrowing Process
Looking for a loan typically means you need to do some research on potential lenders. Once you’ve decided on a lender, you need to start the application process. Before starting the process, ask yourself a few questions.
- What are your intentions with the loan?
- What is your business plan?
- What’s your collateral?
- How quickly will you need the cash?
- How long before paying off the loan?
Once you’ve really thought and established that, you’ll want to look further in to trusted lenders. All lenders work a bit differently from one another. When researching on both soft and hard money lenders make sure to learn about:
- Lending fees and the origination
- Interest rates
- Loan terms
- What others say about them
- Funding through qualifications
What You Need
You want to make sure you have everything ready and set before filling out the application. First thing first, you will need a well thought out plan to show to the lender. You want to show profits and a clear exit plan. You will need a down payment and equity in the property in order to get the funding you want. This means they will need collateral on the loan. The lender will also want to see that you will be capable of paying your loans, so they will be looking for cash reserves.