In the real estate lending world, soft money and hard money loans are funded by similar alternative mortgage lenders. Both hard money and soft are given to borrowers or real estate investors who would not qualify or do not want to go through the process of getting a conventional bank mortgage. However they differ based on the criteria.
To get a better picture of the differences between soft money and hard money real estate loans, understand:
Soft money lenders essentially provide loans to borrowers who would otherwise go for a hard money loan but because the borrowers may have strong income and good credit worthiness, they are able to get better terms on the loan. Essentially making the hard money turn to soft money.
Examples of better terms are more reasonable interest rates and repayment schedules, and flexibility on grace periods.
Hard money loans allows borrowers with low credit scores and no income to get funded because hard money lenders focus on the worth of the real estate and provide money on a percentage of the value of that property.
Though it is much easier to get approved for hard money loans, borrowers need to pay much higher fees. The rate of interest is also quite high compared to soft money loans (Sometimes more than 10-12% higher than conventional banks loans). The origination fees range from 1-3 points. The Loan to value (LTV) typically will be a maximum of up to 75% of the appraised value of the property.
Soft money loans tend to be no more than 3-6% percent of conventional bank loans. Points may be only 1 or not at all, and the LTV can go up to 85% depending on the circumstances.
Since there is less risk for a lender with a soft money loan, the terms are longer than hard money. Typical hard money loan terms are 6 months to a maximum of three years, but soft money lenders will go longer.
Which one is good for who?
Hard money loans are better for real estate investors who may have lots of debt and need fast access to cash for a new purchase or renovation. There are very little verification and paperwork involved with a hard money loan compared to other mortgage loans, so funding can be in as little as a few days. Hard money is best for borrowers who are only planning to keep the property for a short time. The higher expense of hard money loans is worth it if the borrower is planning to make a large profit on the property by flipping it.
Soft money loans are better for either real estate investors or homeowners who cannot qualify for a conventional mortgage, but still have good enough credit to not be a risk for alternative lenders. Also, soft money loans are better for those who are wanting to keep the property for a longer period of time than a flip. Soft money takes a little longer to fund than hard money as verification of the borrower is more detailed.
Qualifying for a either soft money or hard money can vary since different lenders have different criteria. Are you looking for a quick funding and able to handle higher costs? Do you have good enough credit and can wait a little bit longer to qualify for a soft money?
Speaking to various lenders and crunching the numbers with each one to see what best works for your scenario is the best way to go about it.