When arranging finance for real estate purchases, the two standard options you get are conventional mortgages and hard money. Both options have their pros and cons. So, you can only choose between both options if you compare them. So, let’s do the real-estate financing face-off by comparing traditional mortgages with hard money loans.
What is a Hard Money Loan?
It is asset-based financing used to buy or renovate properties by real estate investors. Normally, specialized ending companies or private investors offer this loan for a short term.
Understanding Conventional Mortgages
It is a long-term loan issued by traditional financial institutions such as banks and credit unions. These loans have strict lending guidelines, and they are issued to use for purchasing homes.
The Face-off: Hard Money vs. Conventional Mortgages
You have got a clear picture of both loans. So, let’s compare them to find out which is better for real estate financing.
- Approval Process
- Interest Rates
- Loan Terms
- Down Payment
- Speed of Approval
- Property Type
- Risk Tolerance
1. Approval Process
Can you wait for months to get a loan? If yes, then the traditional route is a good financing option. It involves strict approval requirements such as credit score, debt-to-income ratio, and income options. Borrowers must meet specific criteria for quality.
The approval process for hard money loans is quick. The best thing about this loan is that it doesn’t depend on the borrower’s credit history but mainly considers the property’s value.
2. Interest Rates
You can get hard money loans quickly, but the biggest issue is higher interest rates than conventional mortgages. So, expect to pay something in the range of
8% to 15% or even higher for hard money loans.
3. Loan Terms
If you are involved in fix and flip projects, you can make the most of hard money loans, typically with six months to 2 years terms. If you want to hold a property for a long time, it’s an excellent option to try conventional mortgages. It is a long-term loan with a typical term of 15 to 30 years.
4. Down Payment
You need to pay a higher down payment with traditional mortgages than hard money loans. Typical down payment for hard money loans often ranges from 10% to 30% of the property’s purchase price. The average down payment for a traditional mortgage is 20 percent of the property’s purchase price.
5. Speed of Approval
You can enjoy fast approval with hard money loans. The usual approval time for this kind of loan is a few days to two weeks. It is a viable option when you need a quick investment in property. In the case of conventional mortgages, you might wait for weeks or even months. This loan won’t let you make some profits from some time-sensitive investment opportunities.
6. Property Type
Conventional lenders won’t issue loans for unique or distressed real estate. They only lend money for standard residential properties. So, when renovating an unconventional property, the most suitable option is a hard money loan.
7. Risk Tolerance
Borrowers must have an exit strategy to repay the hard money loan because default can leave them broke if they don’t have it. This loan has a short-term and high level of risk for the borrower and lender. Conversely, conventional mortgages have favorable terms for borrowers and a stable financing option. So, this route is a suitable choice when you can’t tolerate high risk.
It takes work to define a winner in the face-off between hard money loans and conventional mortgages. Because the winner depends on your specific real estate investment strategy, risk tolerance, and goals, you can enjoy speed and flexibility for short-term projects with a hard money loan. Still, it always brings higher costs and risks. Conventional mortgages are suitable for long-term property ownership as they unlock interest rates and stability. Continually assess your financial situation and investment needs carefully when choosing a real estate financing option between hard money and a conventional mortgage.