Hard Money vs Soft Money: What’s the Difference?

If you are thinking about borrowing money, especially to buy real estate, you may have heard about hard money lenders. Most borrowers have very little idea what this slightly ominous-sounding term actually means. Hard money can be a potentially valuable economic tool. However, it is important to know the difference between hard and soft money before making any decisions.

What Do the Terms Mean?

Hard money and soft money can mean different things depending on who you ask and the context of the conversation. In terms of currency, hard money refers to coins and soft money refers to paper money. In politics, hard money is a direct contribution to a candidate and soft money is an indirect contribution to a party or cause.

However, in terms of lending, hard and soft money lenders are either private money lenders, in the case of the former, or more traditional lenders, in the case of the latter. Typically, both refer to loans that are asset-backed by collateral such as a piece of real estate.

Hard Money

There is some disagreement about where the name hard money comes from. Some claim it is because hard money lenders are harder to find. Others suggest it is because these loans usually come with higher interest rates. Yet another group claims the name comes from the fact that the lenders are willing to work with rougher properties.

One of the key features of hard money lenders is that they are more flexible. They can provide short-term financing such as bridge loans, mortgages for distressed properties, fix and flip financing and more. Hard money loans are often popular with commercial borrowers; however, residential borrowers also can get hard money.

Soft Money

Soft money lenders are more traditional lenders such as banks. They are usually more regulated and have stricter rules about qualifications and the types of properties they will lend money for.

The term soft money seems to come simply from being different from hard money loans. Soft money lenders are easy to find, offer low-interest rates and only lend on conventional properties.

Which Is Better?

There is no simple answer to this question. Some people will argue that you should always use soft money lenders. Other people will argue that hard money lets them take advantage of opportunities that they would otherwise miss.

Real estate can be an important part of anyone’s financial portfolio. In some ways, the way you borrow money can be just about important as the property you buy. The best solution is to find the type of loan that works best for your needs and your real estate goals.

Finding the Right Loan For You

Real estate can be a rewarding investment. Whether you are buying a home as your primary residence, a vacation home or investment real estate, planning your finances to achieve your goals is important. Understanding hard money and soft money can help you find the best way to pay for your purchase. You can also get money for improvement with a reverse mortgage. Understand your options and find the right lender for you.