Updated: May 19
Soft money loans are the perfect type of real estate investment loan for a variety of reasons as it primarily serves as an in between option for hard money loans and traditional money loans. Generally speaking, soft money loans are term loans, meaning they cover financing for a set period of time, offered by private lenders that typically have low interest rates, high LTV ratios, service long-term projects (5-30 years), and can be approved as quickly as a hard money loan. They are the primary alternative option in private lending when the hard money option is too expensive for investors and a reasonable option when you can’t get a traditional bank loan. Additionally, the fast approval rate of private lending allows for soft money loans to be competitively appealing against traditional bank loans as those can take months to process and approval. So, why should you get a soft money loan for your real estate investment project? What are its benefits and what can it be used for?
First, there is the LTV ratio. What is an LTV ratio? An LTV ratio is the Loan-to-Value ratio, and it is calculated by dividing the amount of money borrowed by the value of the property’s appraisal. Both the value of the property and the money borrowed can fluctuate, meaning the LTV can also fluctuate. Also, the higher the LTV, the less the borrower is required to put down. With soft money loans, the maximum LTV is higher than most traditional loans. To be specific, soft money loans tend to have a maximum LTV of 85% while traditional loans have a maximum LTV of 70%.
The second benefit and probably the largest benefit is the timeline for soft money loans. While traditional loans from institutional lenders may take months, soft money loan application processes are much faster. Soft money loan applications can take as little as 2-3 weeks to process and you can have your money in that short timespan. When you are trying to purchase an investment property and the deal will close in a month, you can’t wait for traditional loans. It will be too late. If you have a tight deadline on your investment property and you want a quick turnaround, soft money loans are the best option.
The third benefit is that an investment property borrower doesn’t have to worry about income verification. That means you don’t need to provide a source of income as a part of the loan application process. You can get approved for a loan without showing a bank statement or a pay stub. Another bonus is you don’t need to show your taxes on your income or assets. All you need is a decent credit score (above 650), some primary facts about your investment property and strategy, and provide documentation related to your previous investment experience. These are all the things you need, and you can be approved in 2-3 weeks and get the necessary money for your investment property. This is a great opportunity for an investor who may not have a stable cash flow. Additionally, this may discourage traditional bank lenders from providing you with a loan, but for soft money loans, this isn’t an issue.
The fourth benefit is the variety of soft money loans. You can use them on a variety of investment properties. It can only be used for investment properties but there are so many options to choose from. Here are some options: single-family homes, condos, townhomes, multi-family homes, commercial properties, mixed-use properties, office properties, retail properties, industrial properties, warehouse properties, and so much more.
Due to the great perks of this loan program, soft money loan programs tend to be very exclusive. There are so many types of loans, so you want to make sure soft money loans are the ones for you. There are qualified mortgages and non-qualified mortgages and it can get confusing. This would be why it is important to reach out to a private money lender who has a lot of experience with non-qualified mortgages. A private money lender can guide you through the entire process and help you decide if soft money loans or another home loan may be perfect for your investment needs. But as mentioned previously, there are plenty of benefits of soft money loans for investment properties.
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