Hard money lending is another alternative to traditional lending sources and allows borrowers to use the investment (in many cases a property) as collateral on the loan. While many lending sources rely on a borrower's credit history, hard money lending relies on the asset in question. Hard money lending will typically require higher interest fees than traditional loans but can provide borrowers with increased access to capital and a more lenient approval process. Investors with low credit and high equity in a property will often turn to hard money for funding. Additionally, property owners at risk of foreclosure may also utilize hard money loans.
The major difference between soft money vs hard money is that soft money is more suitable for long-term investments while hard money is usually used for funding short-term investments.
Soft Money vs Hard Money Rule of thumb.
A hard money loan is a loan issued by the lending bank known as hard money lenders.
The lenders structure these loans according to the after repair value (ARV) of the subject property and less on the financial strength or credit score of the borrower.
Commercial banks issue soft money loans that are structured based on two primary factors: the credit score of the borrower and their ability to pay every month based on their income.
One of the biggest mistakes that new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals—but a small amount of time on how to raise equity capital from private money lenders. It's just as, if not more, important as finding deals for investors to understand the ins and outs of raising money. Finding a deal is great, but if you don't have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing.
When you make an offer on a piece of property, it is expected (and usually required) that you place an earnest money deposit down with your offer. If you are currently living paycheck to paycheck, coming up with even a few hundred dollars, let alone the thousands needed for a purchase, can be a big hurdle in launching your real estate investing business. Therefore, if you work on raising capital from private money lenders while locking up deals, you will have a greater chance for investment success.
Soft money in real estate is the exact opposite of hard money. Its interest rate is lower than average and acquiring it is also easier.
There are many options for funding p0roperties and soft money is the most commonly used way.
Real property is still used to secure this loan, which means that you need to pledge assets as a form of collateral in the event that default happens.
This is the reason why acquiring a soft money loan is easier and simpler than a hard money loan.
A soft money lender will also focus more on the credit score.
A soft money loan is essentially a type of financing based on assets combining the elements of conventional loans with hard money loans.