Hard Money Loans vs Mortgages: Key Differences You Should Know

Getting financing for a home purchase or renovation project can be challenging. While mortgages are the most common type of home loan, they don’t work for everyone. Hard money loans offer an alternative source of financing, but they differ from mortgages in some key ways.

In this article, we’ll compare hard money loans and mortgages to help you understand which option may be better for your needs.

What Are Hard Money Loans?

Hard money loans are a type of short-term financing provided by private investors rather than banks or traditional lending institutions. They are called “hard money” loans because they are secured or backed by an asset, usually real estate like land or a house.

These loans are appealing because they can be obtained more quickly and with less stringent eligibility requirements than standard mortgages. However, hard money loans typically come with higher interest rates and fees.

Hard money loans are frequently used by real estate investors and developers who want to act fast on a time-sensitive deal. But they may also help individual homebuyers who don’t qualify for a regular mortgage

What Are Mortgages?

Mortgages are long-term loans commonly used to finance the purchase of a house or other real estate. The property serves as collateral for the loan.

Most mortgages are provided by banks, credit unions, and other traditional lending institutions. The most common type of mortgage is the 30-year fixed-rate loan.

Mortgages usually have lower interest rates than other types of financing. But you’ll need good credit and a stable income to qualify. The application process is lengthy, often taking 30-45 days.

Key Differences Between Hard Money Loans and Mortgages

Hard money loans and mortgages have some big differences when it comes to eligibility requirements, costs, and other features:

Eligibility

Hard Money Loans

• Minimum credit scores around 600
• Lower debt-to-income (DTI) requirements
• No income documentation needed

Mortgages

• Minimum credit scores of 620-740+
• Strict DTI requirements (typically 43% max)
• W-2s, paystubs, and tax returns to verify income

Hard money lenders focus more on the property’s value as collateral than your finances. This allows more flexibility if you have past credit issues or problems documenting income.

Costs

Hard Money Loans

• Interest rates 8%-15%
• Origination fees up to 5%
• Other closing costs

Mortgages

• Interest rates 3%-7%
• Origination fees 1%-2%
• Lower closing costs

Hard money loans are more expensive due to the higher risk and quicker process. But specific rates depend on factors like your credit score, loan amount, and location.

Loan Terms

Hard Money Loans

• 6 months – 5 years
• Interest-only payments
• Balloon payment

Mortgages

• 15-30 years
• Equal monthly payments
• Payments pay interest + principal

Hard money loans have much shorter terms than traditional 30-year mortgages. There’s usually a large balloon payment at the end.

Application & Closing Timeline

Hard Money Loans

• Apply and pre-approve in days
• Close in 1-2 weeks

Mortgages

• 30-45 days to get pre-approved
• 30-45 days to close after offer accepted

You can tap into hard money almost immediately while mortgages take 30+ days of paperwork and underwriting. This speed makes hard money loans ideal for investors competing on fast home purchases.

When Are Hard Money Loans a Good Idea?

Hard money loans may be the better choice if you:

• Need financing fast to buy an investment property or fund repairs
• Have a low credit score or limited income documentation
• Only need temporary financing for a renovation project
• Want to avoid stringent mortgage qualification requirements

Investors and home flippers are the most common users of hard money loans. But they can also help homebuyers who don’t fit the narrow mortgage box.

Just keep in mind that hard money loans work best when you only need short-term financing or have a plan to pay off the balance within 5 years or less.

When Are Mortgages a Better Fit?

You’re generally better off with a traditional mortgage if you:

• Are purchasing a primary residence
• Want fixed, predictable loan payments
• Qualify for low mortgage rates
• Need long-term financing (15-30 years)
• Don’t require lightning-fast access to funds

For most homebuyers, a fixed-rate mortgage is the most affordable long-term financing option. Mortgages become even more appealing if you have great credit and ample income.

Just be prepared for a lengthy application process and no guarantees of approval. Hard money offers more certainty.

Tips for Getting a Hard Money Loan

If you decide a hard money loan is your best move, here are some tips to get the process started:

• Check property value. Hard money lenders care about the after-repair value (ARV) of your property. Get an appraisal to confirm the value.

• Find a lender. Ask real estate agents, attorneys, or title officers for reputable hard money lender referrals. Search online as another option.

• Compare offers. Reach out to multiple lenders and compare interest rates, fees, loan terms, and LTV requirements.

• Gather documents. Have personal IDs, bank statements, renovation estimates, and other paperwork ready to submit.

• Know your exit strategy. Be prepared to explain how you’ll pay back the loan within the short repayment term.

The Bottom Line

Hard money loans and mortgages have very different eligibility criteria, costs, and terms. Hard money offers fast access to funds but at higher rates. Mortgages provide affordable long-term financing if you can qualify.

Carefully consider your specific needs and financial situation. That will determine whether a hard money loan or traditional mortgage is the better fit. With the right financing approach, you can make your homeownership dream a reality.