Introduction
People commonly avoid taking loans. They understand that being in debt is a critical burden that no one wants to be. However, if you want to grab the latest real estate deal or to find your luck in the industry, hard money loans can be your choice!
In general, we go for traditional bank loans as those are trustworthy to all. Bank provides un mortgages to deal with houses and repayments. However, they have various restrictions and demands to provide you with a home loan.
So, there are two different types of loans available that directly work on properties. One is a hard money loan or private lending, and another is a traditional loan or conventional mortgage.
Most people do not know about private lenders, and they try to focus on bank loans. They believe that if they want to build a house, traditional mortgages are the only solution. Well, this is not completely true. While dealing with properties, you may find a better way to arrange capital by considering hard money lenders.
They will not depend on your credit score, and they don’t take much time to approve your loans. So, if you are really working on some quick property deal, a hard money loan is your only solution.
Major Differences Between Hard Money And Traditional Loans
When it comes to financing real estate investments, there are two main options: hard money loans and traditional loans. While both of these types of loans provide borrowers with access to capital, they differ in several important ways.
Here, we will try to focus on and explore the major differences between hard money and traditional loans, including the time frame, property type, interest rate, loan qualification requirements, and debt-to-income ratio.
Whether you are a real estate investor or a home buyer, understanding these differences can help you make an informed decision about which type of loan is best for your needs.
Time Frame
It is one of the major reasons why people often consider hard money loans over traditional loans. In real estate investments, time is a major factor. No property deals wait for long, and that is a nightmare for property investors.
They often feel a sort of capital, and leading hard money lenders in the Austin area such as HouseMax Funding may approve their loans in as short as a few days.
On the other hand, traditional loans are difficult to borrow without proper eligibility. Even if you are all set to get the loans, it will take a lot of time to get verifications. Accumulating months is common for traditional bank loans.
Property Type
Traditional mortgages are intended to be used for residential purposes. For instance, if you have single or multi-family properties, you can consider investing some more money to prepare it in your best interest.
On the other hand, hard money lenders are the savior of investors in the real estate market. For instance, fixing and flipping properties are the best reasons to go for hard money loans. Here, the owner is not going to use the property for residential purposes.
In a nutshell, a hard money loan is best for non-owner properties, and traditional mortgages are good for owner-occupied properties.
Interest Rate
The repayment tenure of hard money loans can be roughly from 5 to 30 years. On the other hand, hard money lenders provide only from a few months to 5 years of repayment span to the borrowers.
This might seem critical for the borrowers, but there is a correlation with the conditions. As the repayment tenure is short with hard money loans, they charge high-interest rates compared to traditional loans.
So, you are bound to repay as early as possible.
Loan Qualification Requirements
Hard money loans only focus on the property condition and nothing else.
On the other hand, traditional banks consider your credit score, current financial condition, and documents. They are very firm with their requirements, and they do not allow taking loans until the requirements are fulfilled.
Debt To Income (Dti) Ratio
If your debt-to-income ratio is more than 45%, it will be hard to take loans from traditional mortgages. While a bank is commonly concerned about your creditworthiness, they focus on your income, proof of employment, and credit report.
A prejudgement of credit is possibly done by them through the DTI ratio. It is the ratio of your gross monthly income and debt payment.
Can The Difference Influence Your Decision?
Hard money loans are best for business projects. Ordinary home buyers are best suited to traditional mortgages. On the other hand, financial investments in real estate are much more dependent on hard money loans.
An investor can purchase a property, consider fixing and then go for direct selling in quick succession. This is where the turnaround time becomes merely a matter of months. So, coping with high-interest rates of hard money loans becomes possible for investors.
Apart from that, the loan applications are reviewed quickly with hard money loans to make it a suitable choice for real estate investors.
Now, it’s on you to decide accordingly by considering the difference in purpose.
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