There is a lot of confusion between the phrases “Hard Money” and “Conventional”. Many people think that hard money is for people who cannot get a bank loan, whereas Conventional is for everyone else. This is not the case any longer though. Hard money loans are utilized as tools for many real estate investors – even those who can qualify for more conventional funding.
The basics of hard money and Conventional:
Hard money is a monetary loan employed for a specific purpose & with a defined timeline for paying it back – often less than 3-5 years. Conventional on the other hand is a money loan that can be for any purpose and is often a longer term loan that is meant to be kept. Turn times on hard money loans are typically much faster than those of conventional loans. This makes hard money lending in California a great source of capital for entrepreneurs. Nevertheless, there are other differences between hard money and Conventional that you need to be aware of.
Overview of hard money:
Hard money financing is basically a kind of asset-based loan in which the borrower gets money that is secured by real property. Private investors & group of investors usually work as hard money lenders.
It is known as hard money loan because the terms are typically higher than what you would get through a more conventional banking source. You are paying a higher interest rate with a hard money loan compared to typical property financing, with hard money loan rates falling out anywhere in the 8-12% range (although there are hard money loans that go out at higher and/or lower rates).
Of course, this is mainly because they carry a higher risk to the lender & short duration of the loan itself.
Instead of checking your credit score, hard money lenders make a decision whether to loan you funds according to the property for which the cash will be employed. This makes it an attractive form of financing for real estate developers and house flippers. The underwriting process is much faster than that of a bank, as the main criteria are the use of funds, the loan to value and the exit strategy.
Overview of Conventional:
A Conventional Loan is quite the opposite of hard money loan; it carries a lower interest rate but requires more rigorous underwriting – which often times can take 30-60 days or longer, depending on the transaction. Granted, it is still secured by real property – meaning you will still need to pledge assets as security in the event of default.
Also, Conventional lenders place much more emphasis on your credit score. These loans are priced and qualified not only on your credit score, but also based on specific events. For example, you could have a good credit score, but have a foreclosure or bankruptcy from a couple years ago which may decline your file.
Both hard money and Conventional Loan have their pros and cons. Your specific situation often times will dictate what type of loan is best for you.