What's The Difference Between A Conventional Loan And A Hard Money Loan?
Hard Money Loans
A Hard Money Loan is also called an Asset-based loan because the underwriting (decision to make a loan or not) is primarily based on the equity or value of the property in which the loan is being made. A hard asset is the “HARD” in Hard Money). Hard Money loans almost always come from Private Lenders who are lending their own money or a group of investors money. Hard Money loans are most commonly business purpose in nature which means the loan is being made on an investment property like a home that is being rented or a commercial building. Hard Money Loans, Fix and Flip Loans, Rehab Loans, are designed for investors who are purchasing distressed real estate at a discount and need cash to close. The goal of the loan is to help an investor acquire a piece of property. If they plan to hold the property they will commonly go back to the bank and get a refinance at a lower interest rate after the completion of the rehab. If they want to flip the property, then the goal will be to be to buy the property at a discount, fix it up, and sell it quickly.
Hard Money Pro:
- Speed to close the loan – Typically around a week.
- Much less required documentation to get a loan
- Less regulation allows for different qualifications to get a loan approved – The lender sets the qualification terms not the government and they can decide what makes you a good candidate to lend to.
Hard Money Con:
- Expensive - Because a private lender is generally using their own money, they determine the interest rate which can vary a lot. Private Lenders will almost always require a higher rate of return (higher interest) than banks who get their money from less costly sources like depositors or the Federal Reserve.
- Less Regulations also allows the lender to set their own terms for the repayment of the loan. Be sure to read, understand, and agree with all your lenders terms of the loan.
Conventional or Conforming loans are called that because the conform to Fannie Mae and Freddie Mac guidelines. Fannie and Freddie buy a lenders real estate notes and a lender must adhere to their guidelines if they want to sell that note to Fannie or Freddie. Those same standards have also been adopted by other banks as well, even if they don’t plan on selling the note. Because they are conforming it also protects other financial intuitions who may end up buying your note down the road. Mortgages (like any asset) can be sold or transferred. Mortgage notes are commonly traded amongst banks, investment houses, and on the secondary market to RETS, and investment funds. The more conforming a loan, the easier it can be sold which allows banks to be much more aggressive in the discounting of the interest rate to the borrowers.
If the loan is on a person’s primary residence, lenders are also required to comply with all federal and state guidelines like RESPA, TILLA, TRID, and others.
Conventional Loan Pro:
- In general, a Conventional loan or conforming loan is going to be the best and lowest cost option for people purchasing their primary residence. Conventional loans will generally have the lowest interest rates because they are designed to be paid off over a long period of time.
- These loans are regulated, and the regulations intent is to protect borrowers from predatory lending practices and from getting a loan they cannot afford long-term.
Conventional Loan Con:
- You have to be a well-qualified borrower in terms of your credit score, taxable income, steady and consistent income from a job you have been working at for 1 to 2 years. You need to have low debt and a good payment history on the debt you have borrowed in the past.
- It is going to take a while. Plan on 60-days to apply and get a loan. It can happen quicker, but don’t plan on it. There are a lot of documents and steps required to show you are a good borrower and the property you are purchasing is a good asset.
- You will need to pay for need an appraisal.