Finding a good real estate deal is only half the battle won; getting the best financing is the other half. Hard money loans and soft money loans are two great ways to fund your real estate purchase or investment. Both of these financing options have their pros and cons, which you have to carefully consider making the right decision between them. Take a detailed look at the differences between hard and soft money loans.

What Is a Hard Money Loan?

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In real estate, a hard money loan refers to a type of loan that requires you to use your real estate property as collateral. It’s regarded as a short-term bridge loan or “last-resort” loan. The terms of a hard money loan are primarily based on the value of the collateral, not the credit standing of the borrower. Since it doesn’t involve lengthy credit checks, it provides quicker access to the funds you need. Hard money lenders are usually private individuals or companies because traditional lenders consider this type of loan a risky venture.

What Is a Soft Money Loan?

A soft money loan is the exact opposite of a hard money loan. It’s a more traditional loan that has a below-market interest rate and a long repayment term. A real estate property is also used to secure this type of loan, meaning your lender will require you to pledge your asset as collateral just in case you default on your loan. Soft money lenders are typically banking institutions, and they focus more on your creditworthiness.

Examples of Hard and Soft Money Loans

A hard money loan is a flexible financing option that can be used for a variety of purposes. An example of a hard money loan is mortgage refinancing. You can get a refinance to pay off one or more loans that are secured to your property. As a result, you’ll have a new loan that typically comes with a larger principal balance and a lower interest rate.

A cash-out refinance is another type of hard money loan. It involves getting a new loan that’s larger than the total amount of your old loans and the costs incurred to obtain the funds. The remaining money is called “cash to the borrower,” which is the net proceeds of the loan. You’re allowed to use the proceeds for any purpose, from home improvements to debt consolidation. Other examples of hard money loans are bridge loans and equity loans.

A soft money loan is meant for purchasing a home, meaning it isn’t a good option for home repairs and improvements. One example of a soft money loan is a purchase money loan. Such a loan offers you purchase money that makes up part of the price of the home you intend to buy. You can use the funds to purchase any type of residential property, from a single-family house to a condominium unit. Since the loan is secured against the property, your lender is legally allowed to seize your home if you’re unable to make your payments.

Ways To Use Hard and Soft Money Loans

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A hard money loan is a suitable financing option if you’re a property flipper who plans to renovate and resell the property you use as collateral within a year or sooner. By selling your property and paying off your loan quickly, you’ll be able to offset the higher cost of a hard money loan. In most cases, a hard money loan comes with a loan term of one to three years.

A bridge loan makes it easier to refinance tricky loans at high rates because it offers temporary relief and funding. You can take out this type of loan while waiting for your application for a soft money loan to be approved. In addition, a hard money loan can be used for improving an existing property, avoiding foreclosure, or funding any time-sensitive, short-term investments.

If you plan to buy a new home, you’ll be better off with a soft money loan. You can also use this type of financing to fund a long-term real estate investment. One way to invest the money you receive from a soft money loan is to purchase a property and lease it out to generate long-term income. Since soft money offers lower interest rates, you’ll pay less over time.

Also, you may be able to get a soft money loan for home repairs and improvements. Some banks offer long-term loans for these purposes, but they generally require you to undergo a lengthy application process.

Things To Consider When Choosing Between Hard and Soft Money Financing

To determine whether a hard money loan or a soft money loan is a better option, you need to look at your personal situation and the reason you’re getting the loan. The following is a list of things you should take into consideration:

  • Equity contribution: A hard money lender may require you to come up with up to 40% of the property’s after-repair value, while a soft money lender typically requires an equity contribution of at least 25%. As such, the type of loan you can get depends on your ability to contribute equity.
  • Credit standing: If you have a credit score below 640, you’ll most likely not qualify for a soft money loan. So, you should focus on obtaining a hard money loan instead.
  • Reserve funds: If you’re able to reserve at least six months of loan payments, a soft money lender may consider your application, even if you have only a fair credit score. A six-month reserve can also help ease a hard money lender’s doubts about your ability to meet your loan obligations.
  • Processing speed: You may be able to get a hard money loan in as little as 10 days. A soft money loan, on the other hand, may take more than a month to process.

Whether you need a hard or soft money loan, you can rest assured you’ll get a great deal at Titan Funding. Contact us today to find out more about our financing solutions.

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