Differences between conventional loans and hard money loansDecember 2018 Leave your thoughts
Purchasers of real estate typically think of two options in terms of debt financing needed to fund the purchase. Both are competitive and offer specific benefits. Knowledge of the investor’s needs and circumstances shape whether a conventional mortgage or a hard money loan is the preferred option. Though most people understand the basics of a conventional mortgage, many may not be as familiar with a private loan or hard money loan backed by real estate. Here are some key differences between the two types of loans.
One of the key determinants is the speed necessary to close. There is a significant difference between a hard money loan and a conventional mortgage. With a conventional mortgage, it usually takes several weeks to close after detailed underwriting is performed and completed. With hard money, well-positioned hard money lenders can usually close within a week, and are familiar with the necessary speed expectations. The time it takes you to obtain debt funding and bring it to the closing table can be crucial when buying from parties seeking a quick close quickly.
Conventional mortgages are funded by traditional lenders who sell their loans to larger banks or to other investors either individually or in bulk pools. Hard money loans are funded mostly by private lenders. The money may come from individual investors, high net worth families, private 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. In recent times, fintech companies have platforms seeking to acquire hard money loans from originators to build their bulk and sell via their B-2-B platforms.
Interest Rate and Fees
Across the board hard money rates are higher than on conventional mortgages on both interest rate and fees. This is due to the fact that hard money lenders are typically loaning the money for short periods of time with voluntary prepayment at no additional penalty. Factored into the pricing of a hard money loan is asset coverage, lesser reliance on the borrower profile, the risk that the loan payoffs rapidly soon after funding, and oftentimes credit issues of the borrower. Conventional loans may be for as long as 30 years, have greater due diligence, and where the borrower 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 or circumstances where the borrower has impaired credit or cannot demonstrate stability of cash flow earnings are challenged in being approved for a conventional mortgage. Hard money lenders lend for both residential and commercial properties, although not permitted to lend money for owner-occupied properties or properties being used for personal or household use. Hard money loans include 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 over the term of the loan. Hard money loans are interest-only paid in cash and typically have a term of one year or less.
Both conventional lenders and private lenders have reputations that they seek to build on for ongoing, repeat business and building of long-term relationships with borrowers and intermediaries. Cliffrock Private Lending LLC looks forward to speaking with you about your funding needs. We are competitive, quick to close and value relationships. Please contact us.
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