As we all know, everything has its opposite: day and night, up and down, republican and democrat. So, it stands to reason that both hard money and soft money loans exist. But what is the difference between the two? Is one akin to diving into a pool of money versus diving onto a mattress stuffed with cash? Both may be profitable, but it’s important to understand the fundamental distinctions of each.
A simple Google search on the matter might cause some confusion for those who don’t speak the lingo of lending. Hard money and soft money mean different things to different industries, as they do in campaign finance, or in other financial services outside of loans. This information might be useless to a person looking to invest in real estate. Why all the confusion? Well, for starters, the term “soft money loan” isn’t often used in the industry. We generally refer to these as traditional loans. Most loans follow the strict guidelines that banks put forth, which means there isn’t much of a point in using the term. Hard money, on the other hand, stands out from the crowd. Our loans fill a gap in the market that these traditional loans can’t fill, which is why this type of loan was given its own specific title.
The Investor's Edge is here to help clarify the differences and similarities between hard money loans and soft money loans, so you can determine which is more suitable for your needs as you pursue a variety of investment opportunities.
What is a Soft Money Loan?
By definition, a soft money loan is a more traditional loan with a below-market interest rate. This type of loan has longer repayment periods and interest holidays. A car loan would be a good example of a soft money loan. Some auto loans offer 0% APR for an amount of time (interest holiday) and repayment periods extending from two to six or seven years. A soft money loan is usually provided by a certified lending institution. Like we mentioned before, you don’t hear the phrase “soft money” very often in the lending world; it is simply a blanket term for the many loans out there that follow this basic structure.
What is a Hard Money Loan?
In contrast, a hard money loan is a short-term bridge loan backed by the value of the property versus the credit worthiness of the borrower. These types of loans are usually funded by private investors and have more rigid repayment schedules and lending criteria. Hard money loan terms are designed to be shorter, with repayment owed within 3-6 months, depending on the hard money lender.
Similarities Between Hard and Soft Money Loans
Both kinds of loans involve an eligibility criteria and repayment terms. Also, both hard and soft money loans have contingency plans set in place to protect the investment if the deal happens to go south for one reason or another.
Differences Between Hard and Soft Money Loans
One of the biggest differences between the two loans is summed up in two words: credit score. With a soft money loan, you are expected to pledge assets as collateral. Your credit score is also taken into account. To qualify for a soft money loan, your credit score must be above a 580. Usually, the higher the credit score, the lower your interest rate and longer your repayment term can be.
With a hard money loan, your credit score plays no factor in loan eligibility. Hard money lenders fund based on the quality of the property, rather than the credit quality of the borrower. Therefore, you are more likely to receive funding for a hard money loan, and more quickly, too. But let’s move on to the pros and cons of each type of investment loan.
Pros and Cons of Soft Money Loans
PROS:
- Soft money loans have lower interest rates depending on the borrower’s credit score.
- Soft money loans can fund up to 90% of a property’s LTV.
- When you take out a soft money loan, it becomes part of your credit history and can help you build and/or repair credit.
- Soft money loans have a more flexible repayment schedule, depending on the borrower’s credit score.
CONS:
- You can’t get approved for a soft money loan with bad credit.
- You must turn over some assets as collateral for the loan.
- In addition to demonstrating good credit, the borrower needs to prove they have 3-6 months worth of loan payments in reserve.
- Soft money loans have longer closing times: 10-14 days.
Pros and Cons of Hard Money Loans
PROS:
- Hard money loans are easier to obtain since they don’t take credit score or history into account.
- It’s easier to achieve your financial goals with a hard money loan, especially if you have poor credit or a bad financial history.
- Hard money loans don’t require a large down payment, proof of loan payments in reserve or collateral.
- Hard money loans can close faster than soft money loans: 3-5 days vs 10-14 days.
CONS:
- Since the loans are short-term, the interest rates are higher than a soft money loan. However, if you repay your loan within the specified time-frame, high interest rates won’t affect you as much. The rates will affect you even less if you pay off your loan early.
What’s the Conclusion?
It’s unanimous among financial investors and advisors that hard money loans are definitely the way to go when investing in real estate. According to Riverdalefunding.com, “The nature of the loans makes them suitable for flipping properties, constructing new properties or as bridge loans. All these projects need you to borrow a certain amount of cash quickly for a very short time… Once you have understood this difference between hard and soft money loans, you need to know that your needs as an investor will be best met by a hard money loan.”
If you’re looking for a hard money loan, you don’t have to look any further!
The Investor's Edge provides funding, tools, REI resources, and excellent customer support to help guide you through your next profitable deal. Our team is 100% dedicated to helping you achieve massive profits and investment success.
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