If you are looking to invest in real estate and need financing, you might be thinking you have two options: a conventional mortgage or a hard money loan. Though most people understand the basics of a conventional mortgage, many may wonder, “what is a hard money loan?” Here are some common differences between the two types of loans.
Conventional mortgages are funded by lenders who sell their loans to larger banks or to other investors. Hard money loans are funded mostly by private lenders. The money may come from individual investors, lines of credit, or various types of investment funds. Hard money loans are typically not sold to anyone, remain with the originating lender through payoff, and are usually serviced by that lender.
One of the biggest differences between a hard money loan and a conventional mortgage is how long it takes you to close. With a conventional mortgage, it usually takes several weeks to close. With hard money, you can usually close within a week, sometimes less. The time it takes you to get money can be crucial when you are buying from someone who wants to close quickly.
Across the board hard money rates are higher than on conventional mortgages. This is due to the fact that hard money lenders are only loaning the money for short periods of time and not for 30 years where they would be collecting large amounts of small interest payments over time. Hard money interest rates are also higher due to the fact that the majority of the properties financed are distressed.
Lenders offering conventional mortgages will typically loan on residential properties used for personal residences, as well as rental properties. These lenders place a larger emphasis on the credit-worthiness of the borrower, as well as the condition of the underlying asset. Properties that are distressed cannot be approved for a conventional mortgage. Hard money lenders lend for both residential and commercial properties, although they almost never lend money for owner-occupied properties or properties being used for personal or household use. Hard money loans are designed for distressed properties and are used by investors looking to buy and renovate, either to flip or refinance and keep as a rental.
Most conventional mortgages have interest rates that are fixed for 30-years, and are fully amortized. Hard money loans are interest-only and typically have a term of 1 year or less.
Source: Investment Mortgage