If you are thinking about investing in real estate, you may have already come across the terms “hard money loans” and “conventional loans”. While both offer funding for people who want to invest in real estate, they are very different types of loans.
Discover the main differences between hard money loans and conventional loans right here. Plus, find out the pros and cons of each lending option and how to choose the right one for your next investment.
What is a hard money loan?
A hard money loan, also known as an asset-based loan, is a type of loan that is primarily based on the equity or value of a property. Hard loans almost always come from private lenders who are lending their own money or a group of investors’ money.
This type of loan is most commonly used by businesses that are looking to acquire a piece of real estate. You can find out more about how does private money lending works here.
What is a conventional loan?
A conventional loan, or traditional loan, is typically a long-term loan that is provided by a bank or credit union. These generally come with a long-term repayment plan of between 5 and 10 years with strict income and credit requirements.
You can find conventional loans with both flexible and fixed rates, but you will usually need to put down at least 20% of the property’s value as a down payment.
What are the considerations of a hard money loan?
- Quick to close – typically within one week
- Much less documentation and checks are required
- Fewer regulations for different qualifications
- Higher interest rates
- Varying terms and conditions
What are the considerations of a conventional loan?
- Lower interest rates
- Lower monthly repayments
- Can take several weeks or even months to close
- Strict credit checks are carried out
- Longer repayment plans
How to choose the right type of loan for you
When choosing the right type of loan for you and your investment plans, you need to think carefully about what you need both in the short term and in the future.
If you are looking to buy a property as an investor and you are confident that the project will be completed on time, within budget, and can be easily sold within the allocated timeframe, then you are well suited to a hard money loan. They are well suited for fix and flip projects to help get your portfolio started.
Furthermore, if you do not have the best credit rating and need an injection of cash sooner rather than later, then a private lender is your best choice.
However, if you want to secure the lowest interest rates, you may be better off with a conventional loan if you want to purchase a property as a long-term investment.
Whichever type of business loan you choose, always make sure that you read the terms and conditions of the loan agreement carefully and be confident that you can comfortably afford the monthly repayments.
