How Are Hard Money Loans Different From Traditional Loans?

Traditional loans don't always meet the needs of either the lender or the borrower, and this is where hard money loans come handy. Also known as private money loans, hard money loans get estimated by the collateral of the estate in question. With these loans, the credit profile of the borrower is not a deciding factor which can be very helpful for people with bad credit who require a loan. 

On the other hand, hard money loans come with conveniences for lenders and investors, too. They are issued by an investor whose loans are secured by real estate. Even though the rates of hard money loans are usually higher than those of traditional loans, the advantages are still numerous. 

Hard Money Loans Vs Traditional Loans 

Even developers and investors with full access to bank credit often favor hard money loans for many reasons, so let's quickly compare the two types of loans to see their pros and cons. 

Hard Money Loans 

Also known as a private loan or an asset-based loan, a hard money loan is based on the value of the real estate in question. The HARD in hard money loans comes from the hard asset it relies on for approval. 

The decision to either give a loan or not is entirely made based on the equity of the property. In a majority of cases, hard money loans come from private investors. They are mostly for business purposes, meaning the lender makes the loan on an investment property such as commercial buildings or houses and apartments that are up for rent. 

Hard money loans are specifically designed for investors who purchase distressed real estate at a significant discount. The main goal of these loans is to enable an investor to acquire a piece of real estate or any hard property. If the investor wants to hold the property, they can get a refinance from the bank at significantly lower interest rates after the borrower completes the rehab.  If the investor wants to keep the property, the main goal is to buy it at a discount, upgrade it and finish necessary fixtures, then sell it quickly. 

Hard money loans require less documentation, and it takes little time to close them – about a week. Fewer regulations for getting the loan allow borrowers with bad credit score to get the funds they need. 

Traditional Loans 

Often called Conventional or Conforming loans, traditional loans conform to guidelines by Fannie Mae and Freddie Mac. Freddie and Fannie will go on and buy real estate notes from a lender, and the lender then has to adhere to their guidelines if they want to sell the note to them. Banks have adopted the same standard, even in cases where they don't want or need to sell the note. Because of the guideline conformation, the procedure also protects all institutions who may buy the note along the way. This principle allows the institutions to sell and transfer mortgages and trade mortgage notes with investment houses or other banks. Although traditional loans are the lowest cost option for borrowers, the regulations require a lot of documentation, a perfect credit score, and around two months to get approved.