Updated: Jul 16
‘Soft Money’ is a relatively new term in the lending industry; an innovative approach to private money lending, a soft money loan combines the benefits of a hard money loan with the greater security that a traditional loan offers. While a soft money loan requires more underwriting, it also offers lower risks and less risk, making it a deeply attractive option to borrowers who find the concept but not the details of a hard money loan appealing.
Hard Money Loans
As you know, a hard money loan is an asset-based loan, based on the Loan to Value (LTV) of the investment property. They require little underwriting, making them a quick loan for borrowers to get approved, are bridge loans, and are generally not based on a borrower’s credit score. This makes them a high-risk loan that is used for real estate investment. The high-risk nature of this type of loan as well as reservations from the 2008 housing market crash, may make some borrowers reluctant to pursue this type of loan. This type of loan also does not increase a borrower’s credit rating, which may also decrease their appeal to borrowers with good credit.
What is Soft Money?
Soft Money is an innovative new approach to private money lending which combines the benefits of both hard money loans and more traditional loans. First, a clarification on the name: the term ‘soft money’ in the world of lending is completely different from ‘soft money’ in the world of political campaigning. In the context of lending, the term ‘soft money’ implies that this type of loan falls somewhere between a hard money loan and a traditional loan.
A soft money loan requires more underwriting than a hard money loan, allowing it to have lower rates and greater security. It is based on both the borrower’s credit score and the property’s LTV, and is always a term loan rather than a bridge loan. Additionally, this type of mortgage loan program is beneficial for real estate investors with a credit score of 650 or above. The combination of lower rates, higher LTV's, no tax returns and a longer time frame makes the soft money loan a better fit than a hard money loan for many borrower’s situations, particularly those interested in investing in long term rental properties.
Soft Money Loan rates start at 4.375% and go up to 85% LTV for most investment property types.
Why is Soft Money the Future of Lending?
Calling soft money ‘the new hard money’ may seem trite and contrived, but upon further reflection, soft money truly is the direction for the future of private money lending.
While the hard money loan is still the most popular option for many real estate investment scenarios, the soft money loan will increasingly become the loan used by first-time real estate investors or borrower’s looking to hold a long term investment property, and investors with a high credit score who are looking for higher LTVs and lower interest rates.
Unlike conventional investment property loans that max out at 70% LTV, a NO-DOC Soft Money Loan Program maxes at 85% LTV and with no PMI. This allows the borrower to put less money down on their purchase.