How are hard money lenders and conventional lenders different?

Hard money lenders and conventional mortgage lenders differ in several ways. Here are some key differences:

Loan Approval Criteria: Hard money lenders typically lend money based on the value of the collateral, such as a property or a valuable asset, rather than the borrower's creditworthiness. In contrast, conventional mortgage lenders place a greater emphasis on the borrower's credit score, income, and other financial qualifications.

Interest Rates and Fees: Hard money lenders charge higher interest rates and fees compared to conventional mortgage lenders. This is because hard money loans are considered riskier and are often used for short-term purposes, such as real estate flipping or bridge financing.

Loan Terms: Hard money loans usually have shorter loan terms than conventional mortgages. Hard money loans are typically repaid within six to 18 months, whereas conventional mortgages can have loan terms of 15 to 30 years.

Loan-to-Value Ratio: Hard money lenders generally offer lower loan-to-value (LTV) ratios than conventional mortgage lenders. LTV ratio is the percentage of the property's value that the lender is willing to lend. For example, a hard money lender may offer a loan of up to 70% of the property's value, whereas a conventional mortgage lender may offer up to 80% or more.

Purpose of the Loan: Hard money loans are often used for short-term real estate investment purposes, such as purchasing a distressed property or financing a renovation project. In contrast, conventional mortgages are used for long-term financing, such as purchasing a primary residence or investment property.

Overall, hard money lenders are a more expensive and short-term option for borrowers who are looking for quick access to capital, but may not have the creditworthiness to qualify for a conventional mortgage. Conventional mortgage lenders, on the other hand, offer longer-term financing at lower interest rates and fees, but require more stringent credit and income qualifications.