HARD MONEY LOAN VS. MORTGAGE

If you want to know how hard money loans are different from mortgages, this post is for you! Both lending sources are options for home buyers and real estate investors. In this post we will outline the difference between hard money loans and mortgages.

Hard Money Loan vs. Mortgage

If you’ve found a property that you’d like to buy but need financing you’re likely considering one of two options.  Either you’re going to go for a conventional mortgage or you might be considering a hard money loan.  Most adults that have financed a car or a home understand how bank mortgages work.  But less adults know what hard money loans are or how-to quality for one.

1. Difference In Time To Get Financed

One of the biggest differences is the time it will take to get financing and purchase the property you’ve found.  When it comes to conventional mortgages it will take weeks, a month, or more to close.  When you get a hard money loan you’ll be closing on your new property in usually about a week or less.  If you’ve found a hot property getting the financing squared away faster than other buyers is a huge edge.  This is especially true if you’re investing in real estate and a prime property has just come on the market.

2. Duration Of The Loan vs. Mortgage

Mortgages are typically set up for 30 year fixed interest rates.  These loans are full amortized and much longer term than hard money.  In contrast a hard money loan have a duration of usually a year or less and are interest only.  At the end of the year many investors have sold or owners can now refinance.

3. Where The Money Comes From

Traditional mortgages get their money from lenders and banks who sell loans to larger banks or to various investors. In contrast the money for hard money loan generally comes from a private lender.  Some hard money lenders use lines of credit or investment funds where others are individual investors.  In the case of Brad Loans; we fund our loans ourselves.

4. Loan Or Mortgage Approval

In hard money lending collateral is the most important factor.  It overcomes issues with bad credit or no credit.  If you have enough income, the property you’re buying has enough value, and your collateral property is worth enough, you’re likely going to get approved.  In hard money lending the loan to value or LTV is an important factor.

You’ll need to have a down payment ready to cover a portion of the property’s cost or be ready to have cross collateral with additional free and clear paid off real estate to put up against the loan.  This is done to make it easier for the lender to have a high degree of certainty that they’ll get their money back.

5. Difference in Interest Rates

Hard money lending is many times done at higher interest rates.  This is because it is used for properties that are distressed and in cases where lenders have less than perfect credit.  In addition, the loan terms are much shorter and lenders need higher interest rates to justify making the loans.  Banks that chip away at you for 30 years collect more money, just slower over a longer period of time.