You are looking to buy a piece of property. You have already had experience with mortgage lending, but now you have associates encouraging you to check out hard money. Do you know the key differences between hard money loans and mortgages? If not, familiarizing yourself with hard money lending will fix that.
Hard money and traditional mortgage financing differ on many levels. They are two different types of lending aimed at two different audiences. Both serve a vital role in helping borrowers obtain property. The issue for you is deciding which to pursue so that you can start researching lenders.
To get you moving in the right direction, here are the four key differences between hard money loans and mortgages:
1. Market Scope
The starting point for hard money loans and mortgages are the two markets they serve. Hard money loans are primarily aimed at investors and business owners. Investors utilize hard money loans to purchase commercial or residential properties. According to Salt Lake City’s Actium Partners, the properties could be anything from office buildings to strip malls and multi-family apartment buildings.
Mortgage lending primarily serves the residential housing market. People obtain mortgages to buy houses they intend to live in. Less frequently, a mortgage will be obtained for the purposes of buying a vacation home or investing in a single-family rental.
2. Loan Providers
The next key difference is found in who actually provides the two types of loans. Hard money comes from private lenders or groups of investors who pool their money for the purposes of loaning it out. Though still regulated, hard money firms are not banking institutions. They are privately owned companies whose business revolves around funding investment and business projects.
Mortgages are provided by banks, credit unions, and third-party lenders licensed as financial institutions. In the case of banks and credit unions, their money is derived from customer deposits. Third-party private lenders may lend their own money, funds provided by investors, or a combination of both.
3. Approval Criteria
How loans are approved constitute the most visible difference between hard money lending and mortgage lending. Hard money loans are asset-based loans, meaning they are approved based on the value of an asset offered as collateral. When a borrower wants to acquire property, the property itself is often the collateral. When a borrower applies for a loan to expand a business, some of the company’s existing assets can be offered.
Mortgage lending is not asset-based. Rather, it is based on the faith and credit of the borrower. The borrower makes a promise to repay based on demonstrable financial resources. As for the lender, loan approval is only given after an underwriter has looked into everything from credit score to debt load and employment history.
4. Rates and Terms
Rounding out the list of key differences are the rates in terms the two types of loans tend to come with. Hard money loans generally have higher interest rates than mortgages. Terms are also significantly shorter. A typical hard money loan has a term of no longer than three years. Two years or less is about average.
Mortgages tend to come with lower interest rates more in line with the prime rate. They also come with longer terms that can be anywhere from 15 to 30 years.
If you are looking to buy a residential property as your primary residence or vacation home, you will have to go with a mortgage. On the other hand, check out hard money lenders if you are looking to buy commercial real estate or a piece of investment property.