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Conventional vs. Hard Money Loans

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When looking to begin investing in real estate, the question of using a traditional mortgage versus using a hard money loan comes up right at the beginning. Though most people know what a conventional loan from a bank is, they often don’t understand what a hard money loan is. Here we discuss commonalities as well as differences.

Source

Conventional loans are funded by lenders or banks who either sell the loan to other investors or to larger banks/wall street. Hard Money loans are funded by investors, lines of credit, private money, or other investment funds.

Time

The difference in time frame for closing is a huge factor when choosing what form of funding for your property. Conventional loans typically take weeks to a month in order to close, while Hard Money can close within a week. This is a big deal when you are negotiating with a seller that is wanting to close soon.

Interest Rates

It’s no question that Hard Money loans have higher interest rates than Conventional loans. The reasoning behind this is because lenders are loaning out money for a shorter period of time, therefore not collect small interest rates for 30 years. Another factor is that these loan are typically for distressed properties.

Property Type

Conventional loans lend on residential, owner occupied properties. They look at the borrower and the asset they are lending on. Conventional loans will almost never lend on a distressed property or to someone with unqualifying credit. Hard Money lenders will lend on distressed properties and almost never lend on an owner occupied property. They will lend on commercial and residential properties, and are geared toward real estate investing. Whether that be fixing a property to flip it or to hold the property as a rental.

Term

Conventional loans are typically 30 years, fully amortized. Meaning you pay interest and principal on the loan over the course of the term, paying off your debt. Hard Money loans are short, often times a year or less, with interest only payments

Qualifications / Requirements

Conventional loans look at the borrower more than a Hard Money lender. Conventional loans look at personal taxes, business taxes, credit, personal financial statements for 12 months, profit & loss statements, and much more. Hard Money lenders look at LLC good standing, 3 months bank statements, credit, experience, and a few other small things. The difference mostly is that Hard Money asks for less documentation from you.

Ultimately, deciding between your loan source depends upon the purpose you need the loan. If you’re looking to begin investing in real estate, we would love to assist you with all of your hard money questions and needs. Contact us today or fill out a short application and we will contact you!

Katie Johnsen, Account Executive. katie@axelendinggroup.com 817-897-7527