For most people looking to get started in real estate, finding a quality loan is paramount to their overall ambitions. However, in an industry dominated by private hard money lenders and traditional bank loans, just how valuable is a Soft Money Loan, and what can you do with it? In summary, you can accomplish a great deal as Soft Money Loans grant many more people more opportunities than they already had in real estate investing.
What is a Soft Money Loan, and what is it used for?
A Soft Money Loan is a long-term loan option for real estate investors that serves as an in-between option for hard money and a traditional bank loan. Soft Money Loans offer long-term financing at lower rates and higher LTV ratios than hard money. For example, direct Private Money and NON-QM Lender Stratton Equities offer Soft Money Loans starting at 5.25% and a loan-to-property value ratio of 85%. This means that soft money lenders can help you finance a property for up to 85% of its original purchase price.
The Truth about Hard Money Loans
A true Hard Money Loan is an asset-based loan, which means the financing is based on the asset's Loan to Value (LTV). Therefore, it looks less at the borrower and more at the equity of the asset, property location, and the LTV of the property.
Unlike the Fix and Flip loan, it doesn’t go through full underwriting, and there’s no minimum FICO requirement for the borrower, as it doesn’t have many guidelines and criteria. When utilizing a Hard Money Loan, your credit report score does not matter; however, you will still need to obtain a credit report.
A Hard Money Loan doesn’t have as many restrictions as one might think, considering that it’s just money, so no more worries about bankruptcies, foreclosures, collections, etc.
Due to the lack of guidelines and underwriting, a true Hard Money Loan is generally capped at 75% LTV or less. It is in the form of a Bridge Loan, which is short-term financing for 12-24 months.
What Can You Do With a Soft Money Loan
Hard Money Loans vs. Soft Money Loans
Soft Money Loans can look like 5/1 ARM, 7/1 ARM, and 30 Year Fixed plans as a long-term financing option. Soft Money Loans are generally utilized for 1-4 Family and Multi-Family investment properties.
There are some limitations with Soft Money Loans. For one thing, you must have a good credit score. Because you are applying for a real estate investment loan without the typical history or capital that hard money borrowers have, you must be able to prove a record that proves financial responsibility and reliability (that doesn’t include the abundance of documentation asked for by a traditional loan such as income and expense statements), hence the credit score.
This is to help convince the lender that you are responsible enough to handle the investment, so be sure to have a quality and consistent credit score at the ready- with a minimum of a 600 credit score for Soft Money Loans.
However, if you cannot keep up with the loan payments, there is also the contingency that the real estate property itself serves as collateral. This is to protect the investments made by the lender if things do not go as planned.
Oddly, this element is not considered with hard money despite hard money engaging with more significant factors of risk and expenses. Lastly, most Soft Money Loans only deal with property values ranging from $100,000 to $5,000,000, so if you are working with or want to work with a property greater than $5 million, a Soft Money Loan likely is not the right fit for you. This ensures that real estate lenders are not providing an abnormal amount of the financing, given how high and flexible they can be with the LTV ratio. This is also to encourage people who do not have the largest amount of capital to have a place within the investment circuit and that those doors are not entirely closed to them. These limitations do exist to preserve the sanctity of the investment, and the risk lenders may entail dealing with non-experts.
How to Build a Career in Real Estate Investing with Soft Money Loans
The primary use of a Soft Money Loan is to make long-term real estate investments; however, you can also use it to invest within your community. Because Soft Money Loans are significantly cheaper than Hard Money Loans, one of the nuances of soft money is that many new people, who previously could not get access to a loan, can apply for one and get it. As such, more people can now get access to financial funding to help build and improve the economic value of their neighborhoods and communities. In addition, they can invest in themselves in a way that they could not before and help lower the barrier to equity growth. Overall, Soft Money Loans are an excellent opportunity for those who need some assistance. Soft money can also be a great gateway into the real estate investment circuit. It serves as a good starting point for many first-time investors who might not have the type of capital required by hard money lenders. They can then use that platform to help gradually grow their portfolio and join the ranks of high-level investors.
Generally speaking, Soft Money Loans can do most things that hard money and traditional banks loans can do, but it provides those opportunities to a different demographic. However, with the advent of soft money offering long-term financing, there are new emerging possibilities within the real estate investment market that were previously not utilized. With new consumers come new ideas, and the realm of real estate investing only grows stronger.
If you’re looking for financing on your next real estate investment, Stratton Equities is the leader in Nationwide Direct Hard Money and NON-QM Lending in the real estate market. Reach out to a member of our team today by applying now at www.strattonequities.com
If you have an investment property and wish to speak with one of our Loan Officers, call Stratton Equities at 800-962-6613, email us, or apply for loan pre-qualification today!
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