Hard Money Lending vs. Traditional Lending

Hard money loans are similar to traditional loans in some ways. The fundamentals are alike: you apply, and if the lender approves the loan, you get your funds. Afterward, you repay the amount you borrowed with interest over a specific term. 

However, the details are where you’ll find the most significant differences between hard money loans and conventional bank loans.  Specifically, they differ in various stages of the process, starting from the application requirements to approval speed, repayment, and use of the loan. 

While conventional mortgages may be the best solution for some individuals, hard money loans are perfect for specific projects. Moreover, sometimes a hard money lender will approve a loan when a bank wouldn’t. 

This article will learn the vital differences between hard money lending such as offered by RBI Mortgages Tampa, and traditional lending. 

Hard Money Loans

Another term for a hard money loan is asset loan because the lender decides to approve or disapprove the loan based on the property’s value or equity. 

Hard money loans usually come from private lenders, both organizations and individuals. Whether it’s a group of investors or an individual lending their money, the loan is always primarily based on the property in question. 

Private loans are usually a safe choice for real estate investors who do house flips. Moreover, the loan form was created to enable investors to buy distressed properties at a low price and close a deal quickly. The goal of a hard money loan is to help the real estate investor buy a property so he can promptly repair and sell it for profit. 

Just like any other financing option, private loans have their pros and cons. 

Hard Money Pros:

  • Fast approval and closure (usually around one week)
  • Fewer regulations allow more flexibility in qualifications for a loan and loan terms
  • Far less documentation required 

Hard Money Cons:

  • High-interest rates: A private lender uses his own money and determines the interest rate – which may vary significantly from one lender to another. Private lenders and investor groups will always require higher interest rates than traditional lenders.
  • Private lenders aren’t required to follow specific regulations as traditional banks do, so they are free to set their terms as they please. You should be very careful and read and understand each term your lender suggests for the loan.

Conventional Loans

Conventional loans conform to guidelines by Fannie Mae and Freddie Mac, which is why they are also called Conforming loans. Other banks have also adopted the Fannie and Freddie standards. It’s a way for financial institutions to protect themselves, but it’s also a way to protect the borrower. 

Since banks commonly trade mortgage notes amongst investment funds, investment houses, and on the market, it’s easy for them to offer low-interest rates. 

In addition to complying with Fannie and Freddie standards, lenders must also comply with various federal and state requirements and guidelines. Complying with TILLA, RESPA, TRID, and others is particularly important when the loan is on the borrower’s primary residence. 

A summary of the pros and cons of traditional loans is easy to comprehend: 

Conventional Loan Pros:

  • Conventional loans are the most convenient and lowest cost choice if you’re buying your first home. Since you pay them off for a very long time, they have the lowest interest rates.
  • All conventional loans comply with regulations. They protect the lenders, but they also protect the borrower from opting for a loan they can’t afford or return. 

Conventional Loan Cons:

  • You need an optimal credit score, a steady and consistent income from a job – and you need to be working on that same job for at least one to two years. You should have low debt, and you must have a positive payment history on any loan you might have acquired in the past. 
  • Conventional loans take time. It may take up to 60 days from the day you apply to the day you receive the funds. It may happen faster, but you shouldn’t bet on it. There are many documents and steps to go through to prove you’re an eligible borrower. You also need to verify the property you’re buying is a valuable asset. 
  • You must pay for an appraisal. 

Summing Up

Real estate investors mostly use hard money loans for business purposes. They are always short-term, and they enable the borrower to get funds quickly. Since private lenders often approve loans when conventional banks don’t want to take the risk, they come with higher interest rates. 

Conventional loans are a good option if you want to purchase your first home and don’t mind waiting a couple of months for approval. They come with lower interest rates and a long repayment term. 

Depending on the purpose of your loan, it should be easy to decide which option to choose.