Soft money loans vs. hard money loans: What’s the difference?

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When you need to take a loan against existing or future property, you have two options in the private sector: hard money or soft money loans. People often oversimplify these two terms into cash on hand for bridge loans, hard money, or cash on paper for probate loans, soft money. While other criteria exist for further defining the terms, like specific use for hard money and general purpose for soft, a borrower or investor needs to familiarize themselves with the differences to choose the best finance vehicle at their disposal.

Overview of Soft Money

Unlike with hard money loans, soft money lenders do not have as stringent expectations for potential clients, and the interest rates are below-average in most instances. You can classify soft money loans as another form of asset-based financing, and like other conventional programs, soft money lenders focus heavily on your creditworthiness, regardless of pledged collateral. The primary benefit of soft money loans is that the United States government does not restrict the use of funds as much as with hard money loans.

Overview of Hard Money

Soft money loans are easier to acquire than hard money loans, but there are some significant benefits to using hard money over soft money. First, an investor with less-than-perfect credit may find a private lender willing to look past their credit score because they are more interested in the property value. Second, private hard money lenders do not require collateral because the property secures the loan. Finally, these loan programs are more of a risk to the lender rather than the investor. However, because of the increased lender risk and the traditionally short-term vehicle of these loans, interest rates are often significantly higher than conventional and soft-money loans.

Best Option Overall

When comparing soft money and hard money loans, it is easy to see they are opposites. Hard money loans do not rely on creditworthiness over property value and often have higher interest rates because of a lender’s risk. Soft money lenders depend on credit to decide about a loan and require collateral to reduce their risk, resulting in often lower interest rates. Both loans, however, are asset-based, and the right option for you depends on term length, creditworthiness and collateral options.

If you own a property outright and want to secure funding for a new project before its sale, a hard money loan may be best. However, if you have excellent credit and will have access to assets in the future to cover a property purchase, a soft money loan may save money and serve you better, especially with minimal restrictions.

Soft money and hard money may seem like vague terms, which leads to significant confusion, but each is a financial vehicle for asset-based investments. If you would like more information about the specifics of hard over soft money, contact a local private lender, and discuss your investment plans. A professional can help you lay out the pros and cons of each loan type, making the decision a little easier.


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