Hard Money Loan and Conventional
For the individuals that are looking to invest in re,al estate there are a couple options to consider when looking for financing. Although you probably have a general idea of a conventional mortgage and what all it entails but may wonder what a hard money loan is. Here are a few of the common differences to give you a better understanding.
As you may already know a conventional mortgage is funded by lenders, the lenders then take your loan and they sell it to either investor or to a larger bank. A hard money loan is slightly different because it comes from individual investors, maybe investment funds or lines of credit. Where a conventional mortgage is sold to someone else a hard money loan typically stays with the original lender and is serviced by them as well.
Now, this is a huge difference between a hard money loan and a conventional mortgage, the time it takes to close. Typically, with a conventional mortgage, you are looking at 4 to six weeks. Hard money can be in as little as 24 hours to a week. The reason for the fast turnaround time is because when you are looking at an investment property the time it takes you to get funds could mean getting the property or not.
You can expect to pay a much higher interest rate with any hard money loan because the hard money lender is only loaning on a short-term basis. A conventional mortgage lender will give you 30 years to pay and would be collecting larger interest payments over the amortization of the loan. Not to mention most of the investment properties that hard money is used for are needing repair.
As noted before, the terms are very different. With a conventional mortgage, you are looking at a much lengthier term, such as 30 years, of course, you can do a much shorter term if you choose but your rate is usually fixed for that term. With a hard money loan, the term is usually less than a year and are interest only.
When you are going for a conventional mortgage loan the lender is looking for people that are usually going to make the property their primary residence, second home, or rental. The lender will place a great deal of emphasis on creditworthiness and the debt to income ratios of the borrower. The property cannot be distressed with a conventional mortgage loan either. A hard money lender doesn’t usually lend on a property that will be owner-occupied and are designed for short-term loans used by investors looking to fix and flip and renovate the property.