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Hard Money Loans vs. Conventional Loans: What’s the Difference? 

Hard Money Loans vs. Conventional Loans: What’s the Difference?

Do you need to borrow some money, but you’re not sure what your loan options are? Are you wondering what you need to qualify for a loan?

The average person in the US has just over 90 thousand dollars in debt. That includes all types of loans and credit card debt as well.

Two common ways to borrow money are conventional loans and hard money loans. Here’s a guide to help you understand the differences between these two loan types.

What Are Conventional Loans?

When asking what is a conventional loan, a borrower might wonder how to get one. The lender bases their approval of most conventional loans on the borrower’s creditworthiness.

A conventional or conforming loan is a loan that meets the guidelines set out by Fannie Mae and Freddie Mac companies. 

It’s very common for lenders to trade conventional loans. The more conforming a loan is, the easier it is to sell. Then a lender can offer lower interest rates to the borrower.

Long-term conventional loans have the lowest interest rates. They provide the lowest cost for the average homeowner. Regulations protect homeowners from borrowing more than they can repay.

To qualify for a conventional loan, you’ll need to show steady work history and adequate income. You also need to have a good credit score. The lender looks at the property you are buying to ensure it’s worth the money. 

Getting a conventional loan can take a long time because there’s a lot of paperwork to prove your creditworthiness. You’ll also have to pay for an appraisal of the property you’re buying.

What Are Hard Money Loans?

The lender bases their approval of a hard money loan on the value of the hard asset the borrower is trying to purchase.

Hard money lenders are individuals or groups of private lenders who lend money for a business purpose. The goal of the loan is to help an investor buy property quickly. 

The hard money lender sets their own rules and decides if you’re a good risk as a borrower. There are fewer regulations and documentation required. The lender sets the terms for repayment of the loan, and interest rates are much higher than with a conventional loan.

See for more information about the benefits of hard money loans.

What Are the Main Differences?

Interest rates for hard money loans are higher than conventional loan rates. Both loan types require regular payments, but hard money loans can set more aggressive terms.

A hard money loan is a better choice if you need money fast. Conventional loans take longer to obtain.

Conventional loans are for more traditional home purchases. A hard money loan is for a quick transaction such as buying and flipping real estate or taking advantage of a sale.

Choose the Right Loan for Your Needs

Now that you understand the difference between conventional loans and hard money loans, you will know exactly which type is best for you. There’s a trade-off between speed and cost to consider. 

You can find more great content on borrowing money and other financial tips on our website.

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