There are many types of loans available to home buyers. Two of the most common are hard money loans and conventional mortgages. Both have benefits and drawbacks, so it is important to understand the differences before you make a decision. Here is a breakdown of the key differences between these two types of loans.
What is a hard money loan and how does it work compared to a conventional loan?
A hard money loan is a form of real estate-based asset financing in which the borrower obtains cash backed by property. Hard money loans are typically issued by private investors or companies.
Hard money lending criteria may be significantly different from that of conventional lenders. Borrowers should expect higher interest rates, points, and fees. Loan terms are usually much shorter, ranging from six months to two years. And because these loans are considered a higher risk, the minimum credit score requirement is usually 660.
Conventional loans are those that are not backed by the government. They tend to have stricter guidelines and requirements than government-backed loans. For example, borrowers must have a minimum credit score of 620 and a down payment of 3% to 5%.
In terms of interest rates, conventional loans are usually lower than hard money loans. The reason for this is that conventional loans are not considered as high-risk as hard money loans. Loan terms are also typically longer, ranging from 10 to 30 years.
The benefits of a hard money loan over a conventional loan
The main benefit of a hard money loan is that it can be easier to qualify for than a conventional loan. Hard money loans are asset-based, which means that the lender will look at the value of the property you are buying, rather than your credit score.
This can be beneficial if you have bad credit or no credit history. As long as you have enough equity in the property, you should be able to get a hard money loan.
Another benefit of hard money loans is that they can be approved quickly. If you need financing fast, a hard money loan might be the right option for you. Hard money lenders are typically more flexible than banks and other traditional lenders.
The drawbacks of a hard money loan over a conventional loan
The biggest drawback of hard money loans is the high-interest rates and fees. Hard money loans are considered to be high-risk, so lenders charge higher interest rates as a way to offset that risk. Points and origination fees are also usually higher with hard money loans.
Another downside of hard money loans is that they typically have shorter loan terms than conventional loans. This means that you will likely have to refinance your loan or sell your property sooner than you would with a conventional loan.
And because hard money loans are asset-based, if you default on the loan, the lender can foreclose on your property. This is not the case with conventional loans, which are backed by the government. If you default on a conventional loan, the government will pay the lender back.
When is it best to use a hard money loan instead of a conventional loan?
Hard money loans are best for investors who are buying properties that need to be fixed up or renovated. The faster approval process and the ability to get financing with bad credit can be helpful in these situations.
Conventional loans are a better option for borrowers with good credit who are buying properties that don’t need any work. The lower interest rates and longer loan terms make them a more affordable option.
What are the factors that lenders look at when considering a hard money loan application?
When considering a hard money loan application, lenders will look at the value of the property you are buying, your credit score, and your income.
The value of the property is the most important factor. The lender wants to make sure that the loan is secured by a property that is worth at least as much as the loan amount.
Your credit score is also important, but it is not as important as it would be for a conventional loan. Lenders understand that hard money loans are riskier and they are willing to work with borrowers who have less-than-perfect credit.
Income is also a factor that lenders will consider. They want to make sure that you have the ability to repay the loan. Hard money loans usually have higher interest rates, so lenders want to make sure that you can afford the payments.
Requirements for a conventional loan application
Requirements for every loan company may differ from each other. The set of documents would vary depending on each situation whether you’re a single parent, a veteran, employed or self-employed. Here is a list of documents that may be asked for when you are applying for a conventional loan.
- A completed loan application
- A copy of your ID
- A copy of your most recent pay stubs
- A copy of your mortgage statement, if you have one
- The name, address, and phone number of your employer
- The name, address, and phone number of your landlord, if you rent
- The amount of your monthly mortgage or rent payment
- Your bank account and routing numbers
- A voided check or deposit slip
- Proof of any other income you receive, such as child support or alimony
- Your most recent tax return
- A list of your debts and minimum monthly payments on each debt
- Your home insurance policy information
- Your vehicle insurance policy information, if you have a car loan
- Your monthly student loan payment information, if you have student loans
- Your monthly child support or alimony payments, if applicable
- Your statement of military service, if you are a veteran or active duty service member
- Profit and loss statements from the last two years
- Bank statements from the last two months
- A list of your business debts and monthly payments on each debt
Credit score and conventional loans application
The first step in applying for a conventional loan is to check your credit score. You can get a free copy of your credit report from each of the three major credit reporting agencies. If you find any errors on your credit report, dispute them with the credit bureau.
Once you have your credit score, you can start preparing your loan application. You’ll need to provide your Social Security number, employment information, and banking information. You’ll also need to provide information about the property you’re buying, such as the purchase price and the address.
Credit score requirement for a conventional loan
The minimum credit score requirement for a conventional loan would be 620 but people with bad credit can still apply for a conventional loan.
If you’re self-employed, you’ll need to provide additional documentation, such as tax returns and financial statements. Once you have all the required documentation, you can submit your loan application to a lender.
The lender will review your application and determine whether you’re approved for a loan. If you’re approved, the lender will provide you with a loan estimate that includes the interest rate, monthly payment, and closing costs. Make sure to compare offers from multiple lenders to get the best deal.
What to do if you are considering a hard money loan
If you are thinking about getting a hard money loan, the first thing you should do is compare interest rates and fees from a few different lenders. Hard money loans are typically more expensive than conventional loans, so it’s important to shop around for the best deal.
You should also make sure that you have enough equity in the property to qualify for a hard money loan. Lenders will typically only lend up to 70% of the value of the property.
Finally, make sure that you have a plan for how you will repay the loan. Hard money loans usually have shorter terms than conventional loans, so you will need to be prepared to either refinance the loan or sell the property.
If you are in the market for a new home, it is important to understand the different types of loans available to you. A hard money loan is a specific type of loan that can be used for purchasing or refinancing a property. This type of loan is backed by the value of the property, rather than by the credit score of the borrower. Hard money loans are typically used as a last resort when other financing options have been exhausted. Conventional loans are another option, and these are backed by government-sponsored entities like Fannie Mae or Freddie Mac. Conventional loans offer more flexibility than hard money loans, and they may be easier to obtain.
Contact Birchwood Loans in Tampa at (727)300-1793 if you would like more information about obtaining a hard money loan. Our company’s goal is to develop a long-term and successful relationship with all of our clients and with years of excellent service under our belt, we also offer consultations. Call, email, or fill up the form and we’ll reach out to you in no time.
