If you’re looking at loans at options, you may wonder about the difference between traditional and hard money loans. Do you need money fast? A loan may help you out, but which kind of loan is right for your needs?
There are traditional and non-traditional loans. So, what’s the difference?
What is a Traditional Loan?
A traditional loan is when you borrow money from a financial institution like a bank. The interest rates are usually lower than non-traditional loans, but the approval process can be more difficult. The process is generally long, and there are a lot of requirements, such as a good credit score, employment verification, and collateral for a low credit rating.
Several types of traditional lending are available for investors. These include:
Conventional Bank Mortgage Loans
These are the most commonly used loans for investment properties. They have the lowest interest rates and come with the most stringent underwriting guidelines. To qualify, borrowers must have a strong credit history and a low debt-to-income ratio.
Lenders look at all your assets and go through your finances thoroughly to make sure you can afford the loan. The process is more in-depth than other types of loans, but it’s worth it because you get a lower interest rate. Commonly, a down payment of 20% is required.
Banks that hold on to the loan rather than selling it off on the secondary market provide portfolio loans. Because of this, portfolio lenders can be more flexible with their underwriting guidelines. Lenders want to see a good credit score and a low debt-to-income ratio, but they may work with you if your credit is not perfect.
However, these loans usually come with higher interest rates. The cost is higher because banks take more risk by lending to borrowers who may not meet all the conventional guidelines.
SBA loans are government-backed loans that are available to small businesses. These loans usually have lower interest rates and longer repayment terms than other loans. Your business must meet specific criteria, such as being in operation for two years and generating a certain amount of revenue to qualify for the loan. SBA loans also have a strict cap on how much you can borrow.
Private Money Loans
These are loans that are funded by individuals or groups of investors. The process is generally quicker than going through a bank, and the guidelines are not as strict. Private money lenders are usually more flexible with interest rates and the amount you can borrow.
However, private money loans come with a higher interest rate because they are considered a higher risk. The best way to find a private money lender is through networking and referrals. Also, understand the risk to you as the borrower before signing on the dotted line. There are no guarantees in life, and a private money loan may not be the best option for you.
if you have a home or property with high equity, you can take out a loan against the equity. Home equity loans usually have lower interest rates than other types of loans because most lenders consider them less risky. You also have more options with a home equity loan, such as a fixed-rate or variable-rate loan. The downside is that if you default on the loan, you could lose your home.
What is a Hard Money Loan?
A hard money loan is when you borrow money from a private lender. The process is usually shorter than a traditional loan, with fewer requirements. For example, you may not need employment verification or a good credit score.
Hard money loans are asset-based, meaning that the loan is based on the value of the property you’re buying. The loan amount is usually a percentage of the property value, and the interest rate is higher than with a traditional loan.
Choosing a Hard Money Loan Over Traditional Lending
The main reason you would choose hard money loans in Los Angeles over traditional lending is because of the speed of the loan process. Private lenders can fund hard money loans fast, while a conventional loan can take weeks or even months.
Another reason to choose a hard money loan is that you may not qualify for a traditional loan. Private lenders may be your only option if you have a low credit score or a spotty work history.
Hard money loans can also be helpful if you need to buy a property quickly. The fast funding can help you close on the property before someone else does. In the current fast-paced real estate market, this can be a major advantage. Properties are selling quickly, and you don’t want to miss out on a great investment opportunity because of a slow loan process.
According to reports, homes across the country are selling in 30 days or less. It’s vital that you can move quickly when you find a property you’re interested in. Hard money loans can help with that by providing fast funding.
However, you should know hard money loans come with higher interest rates and fees. You won’t pay as long as more traditional options. These are short-term loans, so you should be prepared to pay them off quickly. Most lenders offer a duration between one and five years to pay back the loan.
When you’re looking for a short-term fix and want to avoid the lengthy process of a bank loan, hard money loans are a good option. You should compare offers from multiple lenders to get the best deal and make sure you understand all the terms before signing anything.
When it comes to choosing between traditional loans and hard money loans, it depends on your situation. If you have a good credit score and can afford a down payment, a traditional loan may be the best option. However, if you don’t meet all the requirements or need to close on a property quickly, then a hard money loan may be better.