Hard Money vs. Soft Money

Hard money and soft money are terms that are used in a number of areas, including in political party funding. Both in political party funding, as in lending to borrowers, the term hard money means that money is lent for a specific set of uses and repayment criteria are applied. Whereas soft money does not have to have a specific use described, in order for it to be offered. If you are entering the world of investments, you will more than likely come across hard moneylenders at some point. You will want to know who they are, how you can get access to their finance and whether using a hard moneylender is a good thing.

What is hard money?
Investors define money loans as either soft or hard. Soft money is normally quite a bit easier to qualify for and the terms of repayment are flexible. If you have a good track record in raising loans and repaying them on time, soft money loans will be available to you. Hard money, as its name suggests, is completely the opposite and it comes with a number of restrictions. Getting a hard money loan is no more difficult a procedure than arranging a soft money loan, however, the terms and conditions of the loan are more restrictive. The main reason for this is that hard money loans typically come from individuals, and this type of loan is sometimes known as private money.

Whilst financial institutions lend money as its mainstream business, private individuals lending their own personal money will look to make absolutely sure that their loan is protected, as any default would damage them personally. Consider that if you were lending your own money you would do the same for sure.

What are the typical terms for hard money loans?
The conditions for a hard money loan vary from case to case, but a common example for wanting hard money is to buy a property. The property will have a value and if the hard money loan is being used to buy a property, develop it and then sell it into the market, an estimated final price can be calculated. In the case of a property transaction, a hard money lender would lend money up to a certain percentage value of the expected fair market property value; with the guarantee that the property would revert to them should the lender default on the required repayments. The hard moneylender would then have a good deal as the lender could expect to make a tidy profit in the event of default or foreclosure.

With the law increasingly offering consumers greater protection, hard moneylenders have been forced to apply even more strict conditions to protect their investments. In order to remain in business, hard money lenders are looking to receive guarantees that are more than just the equity tied up in a hard money investment can offer.

What should the borrower look out for?
The first most important point is that you clearly understand what the hard moneylender is offering you. Request a contract proposal and discuss it with your financial consultant to be sure that it works for you. If you are developing property and need a hard money loan, you should become familiar with the term after repaired value or ARV). Typically, a hard moneylender will lend you between 56% to 75% of the ARV of a house you plan to develop. So you could be planning to buy a house with a value of $50,000 and renovate it with an expected fair market sale price of $100,000. However, to get the house into this condition it requires $20,000 of repairs and renovation work. The hard moneylender agrees to fund a 70% hard money loan, thereby giving you the means to complete the job.

What interest can you expect to pay for a hard money loan?
The Annual Percentage Rate of interest (APR) on hard money loans is not cheap, and terms vary considerably. You should be expecting to pay an APR of between 11% and 21% and you will need to agree the term of the loan with the hard moneylender. Normally terms range from 6 months to a number of years. In addition, check whether there will be a closing fee charged. The advantage of using hard money loans is that you can buy a property, renovate and repair it and make a handsome profit, if you have done your maths correctly. The hard moneylender gets their investment back plus an attractive amount of interest.