Choosing whether a hard money or soft money loan is better for you depends on your specific situation and investment strategy. Look below and discover the similarities, differences, and a few examples of when and where you may want to choose one over the other.
What are the differences between hard money and soft money?
One major difference between these two loans is that soft money is better suited for long-term investments whereas hard money typically fund short-term investments. But to truly understand the differences we need to start by defining each individually.
Hard money loans are commercial loans issued by lending institutions called hard money lenders. These lenders structure loans based on the ARV (after repair value) of a subject property and less on the credit score or financial strength of the borrower.
Soft money loans are issued by commercial banks and structured on 2 main things: a borrower’s credit score and their ability to make monthly payments based on income.
Use this chart to understand the key differences between hard and soft money, so you can choose the right loan for your needs.
| Hard Money | Soft Money |
|---|---|
| Funding for short-term investments | Funding for long-term investments |
| Funding for properties in poor condition | Funding for properties in good condition |
| Closings as quick as 2 business days | Closings as quick as 30 business days |
| Higher interest rates | Lower interest rates |
| Non-owner occupied properties | Can be owner-occupied |
| More flexibility in structuring loans | Strict standardized loan structures |
| Less government regulation | More government regulation |
| Less paperwork required for closing | More paperwork and procedures prior to closing |
How are they similar?
Hard and soft money loans are both issued by certified lending institutions and can be used by investors to purchase and renovate properties. There’s an abundance of both hard and soft money lenders in the U.S. making it easy for investors to find a lender that fits their needs.
Here are 5 things both hard money and soft money have in common:
- Both are used to purchase real estate
- Both can be used to purchase an investment property
- Hard money and soft money lenders both consider borrower history
- Likely require a down payment or collateral
- Both have monthly interest payments throughout the loan term
When would you use hard vs. soft money?
If you’re planning on purchasing a distressed property to renovate and sell for a profit you should use hard money. These types of projects called “fix and flips” are the most common type of investment project funded by hard money lenders. Investors are usually in and out of a fix and flip project in 12 months or less, which fits the short-term nature of hard money loans.
If you’re looking to purchase a long-term investment like a buy and hold, you should consider a soft money loan. In a buy and hold scenario, an investor will purchase a property, make minimal or cosmetic repairs, and rent it out for a long time regardless of any fluctuations in the market. Because soft money lenders can issue lower interest rates, you’ll be paying less over a long period of time.
Investors looking to acquire a new property, but do not need funding for any renovations or repairs could seek funding through both hard or soft money. The decision on which to choose is based on the condition of the property. If the property needs a lot of work you’re more likely to be approved for a hard money loan. If the property is in good condition or meets the desired quality conditions of a soft money lender, you can also use a soft money loan to fund the acquisition.