The Difference Between Hard Money and Soft Money Loans

by | Feb 17, 2022 | Business Finance | 0 comments

The difference between hard and soft money will depend mainly on the context. That is to say, in the political arena, the two terms denote how contributions are made to candidates. Hard and soft money can also be used when talking about actual currency types. For this article, we’ll discuss different loan types when discussing hard money and soft money.

What is a Hard Money Loan?

Simply put, a hard money loan is usually a shorter-term loan that real estate investors will frequently use when involved with a project that they intend to sell son after project completion. Most often, with hard money loans, a private lender is issuing the funds.

What is a Soft Money Loan?

With a fast money loan, the borrower is usually going through a more conventional lending institution. Soft money loans are geared toward longer-term projects and can be used for real estate or other project types. They are consequently structured more traditionally.

There are several key differences between the two that you should be aware of.

Key Differences Between the Two Loan Types

Among essential differences between hard money and a soft money loan is access to cash. Investors typically need funds right away to move forward with a prospective deal. They will thus turn to a hard money loan because the access to the cash will be much quicker than with a soft money loan. In other words, hard money loans are designed to be fast.

As mentioned, you are likely dealing with a more conventional lender in a soft money loan situation so the process could take a bit longer. However, given the prevalence of alternative and online lenders today, even soft money loans can be executed quickly.

Another essential difference between the two types of loans is the length of the loan. A hard money loan is meant as a temporary solution. Generally speaking, the average term for a hard money loan is around six months to a maximum of 18 months. House flippers, for example, might opt for a hard money loan until they can sell the property and therefore pay the loan back.

With a soft money loan, you are looking at longer loan terms. These can range up to 30 years in some cases. And so, much more like a traditional loan, a soft money loan gives you ample time to pay the funds back.

Qualifying for a Hard Money or Soft Money Loan

With both types of loans, the lender, whether it be a private lender or conventional lender, will look into the borrower’s credit history and evaluate credit score. The better your track record, the more favorable rates you’re going to receive. They will also look at financial statements and the property in question. In a hard money loan situation, the lender assesses both the current property condition and the after-repair value.

Keep in mind, too, that both types of loans, depending on the circumstances, can require collateral or a down payment. Some hard money lenders will often have you put up to 40% of the after repair value. With a soft money loan, you might only be looking at having to put down 20% or less of the project value.

Do You Have Reserve Funds?

As hard money loans are typically geared toward real estate purchases, specifically fix and flip projects, a lender will want to see that you have a reserve fund. All this means is that you have money on hand to meet obligations that may come up. Often, a hard money lender will want to see at least six months of payments in reserve. Going for a soft money loan isn’t always the case because it is a longer-term loan, and you may not need to show an available reserve fund.

The Risks Associated with These Loans

The property is fundamental to a hard money loan. The more apt the property is to sell, the less risky the loan. Because the risk to the lender is higher in a hard money loan situation, your interest rate is also likely going to be higher.

With a soft money loan, the lender will take into consideration the borrower’s background and credit more so than with a hard money loan. Terms tend to be more attractive with a soft money loan. Most would argue that a hard money loan provides more flexibility in terms of overall loan structure, especially as it comes from a private source. With a soft money loan, you’re facing more restrictions and a fixed set of rules regarding how a loan needs to be structured.

First Union Lending is Here to Help

If you need a loan for a real estate project, we would love to consult with you. Our clients turn to us when they need fast and flexible financing options. We offer short-term loans, real estate loans, SBA loans, lines of credit, and numerous other types of funding solutions. Even if your credit score is less than ideal, we most likely still have a product for you. Call today, and let’s get started together.