Hard Money Loans vs. Subprime Mortgage Loans
Buying real estate is difficult when you have bad credit–but not impossible. There are a few solutions for those looking to obtain a real estate loan, whether for an investment or an owner-occupied property. However, it’s important to know which one is right for you. Today, we’ll explore hard money and subprime mortgage loans, how they’re similar, and which is right for you.
Contents of This Article:
- What are Hard Money Loans?
- What are Subprime Mortgage Loans?
- Differences Between Hard Money and Subprime Loans
- Pros and Cons of Each Loan Type
- Find the Right Lender for Your Project Today
What are Hard Money Loans?
Hard money loans are short-term, non-conventional real estate loans that borrowers can use to invest in real estate. Many investors use private money financing, like hard money loans, when they don’t qualify for a traditional mortgage loan to fund an investment property. That said, hard money loans can only be used for investment properties, while other loan types can be used to fund owner-occupied homes.
Since they are short-term loans, many investors use hard money loans for fix-and-flip projects or to bridge the gap between other financing solutions. However, in order for them to make sense for both borrowers and lenders, the after-repair value of the property must be high enough to cover the purchase price, renovations, and other costs associated with the loan.
What are Subprime Mortgage Loans?
A subprime mortgage loan is a type of loan specifically designed for high-risk borrowers. Typically, borrowers with poor credit or no income can apply for a subprime mortgage loan to fund an owner-occupied property. That said, there are a few different types of subprime mortgages that borrowers can utilize, including the following.
- Adjustable-Rate Mortgages- The most common type of subprime home loan is the adjustable-rate mortgage. These loans typically start with a lower rate and eventually shift into a “floating” rate tied to a market index. While they may be easy to repay in the beginning, the shift to another rate can increase monthly payments significantly, making them hard to repay.
- Interest-Only Mortgages- With an interest-only mortgage, borrowers can choose to only pay the interest due on the loan without paying back the principal for the first few years of the loan. Then, at the end of the initial period, they can renew the loan or refinance and start paying down the principal.
- Extended-Term Mortgages- Finally, extended-term mortgages have 40 to 50-year repayment periods instead of the traditional 30 years you’d see with a conventional mortgage. While longer terms can lower the monthly payment, it means you’re tied to the loan for a longer amount of time and can cost more in the long run.
Differences Between Hard Money and Subprime Loans
Hard money loans and subprime mortgages are both viable solutions for those looking to buy real estate but don’t qualify for a traditional mortgage. While they have a similar purpose, they are not to be confused with one another. There are several differences between the two, including the following.
- Purpose of the Loan
- Requirements
- Type of Lender
- Interest Rates and Fees
- Regulation
Purpose of the Loan
One of the main differences between hard money loans and subprime mortgages is the purpose of each loan type. For instance, hard money loans are primarily used for short-term real estate investments or projects, not owner-occupied residences. Most hard money loans are paid off within a few months to a few years. On the other hand, subprime mortgage loans are used by people with poor credit to buy a home. That said, they are generally much longer-term loans compared to hard money loans–sometimes ranging from 40 to 50 years.
Requirements
While most loans require borrowers to have good credit, hard money loans mainly require collateral, usually in the form of real estate.
Lenders focus more on the value of the collateral rather than the borrower’s credit history. However, while borrowers can still obtain a subprime mortgage loan with poor credit, they usually need to meet certain criteria like income verification and debt-to-income ratios.
Type of Lender
Another main difference between the two loan types is the type of lender who offers them. Private investors or specialized lending companies, like Maryland Hard Money Lenders, usually provide hard money loans. However, traditional financial institutions, like banks or credit unions, offer subprime mortgage loans. There are also specialized subprime lenders who cater to borrowers with lower credit scores or less favorable financial profiles.
Interest Rates and Fees
Both hard money loans and subprime mortgage loans tend to have higher interest rates and fees. However, with hard money loans, borrowers may also face additional fees such as origination fees or points. Subprime mortgages often come with high fees and interest rates, but they may vary depending on the borrower’s credit profile.
Regulation
When it comes to the regulation of each loan type, there are a few differences. For instance, hard money lending, while it varies depending on jurisdiction, is often less regulated than traditional mortgage lending. This can make them a bit more risky, although they’re also more flexible. On the other hand, subprime lending practices have become more regulated since the 2008 financial crisis, protecting consumers from predatory lending practices.
Pros and Cons of Each Loan Type
While hard money loans and subprime mortgage loans are both good options for those who don’t qualify for traditional financing, it’s important to explore the good and the bad. Here are some of the pros and cons of each loan type.
Benefits of Hard Money Loans
- Fast Access to Capital- Hard money loans offer quick approval and funding. This makes them great for time-sensitive investments or situations where traditional financing is unavailable.
- Fewer Requirements- Hard money loans are secured by real estate, not necessarily a borrower’s credit. With fewer credit and income requirements, they’re more accessible to investors with poor credit.
- Flexible Terms- Hard money lenders may offer more flexible terms than traditional lenders. This means you may be able to negotiate repayment schedules or other loan terms.
Drawbacks of Hard Money Loans
- Higher Interest Rates and Fees- Hard money loans come with higher interest rates and origination fees, which can increase the overall cost of borrowing.
- Short Loan Terms- These loans are usually short-term, meaning you must repay them within a few months to a few years. Unfortunately, this can be challenging for borrowers who may need longer-term financing.
- Risk of Foreclosure- Because hard money loans use investment properties as collateral, you risk losing your investment if you’re unable to repay the loan.
Pros of Subprime Loans
- Opportunity for Ownership- Subprime mortgage loans allow individuals with lower credit scores to become homeowners. So, if you get denied a traditional mortgage loan, you may be able to achieve the dream of homeownership through a subprime mortgage.
- Flexible Use- Depending on which type of subprime loan you get, you may be able to use it for various purposes, like debt consolidation, home improvements, or covering unexpected expenses.
- Potential to Boost Credit Score- If you’re responsible and pay your subprime loan on time, it can help you rebuild your credit, allowing you to borrow on better terms in the future.
Cons of Subprime Loans
- Higher Interest Rates- Subprime loans come with higher interest rates and fees than traditional mortgage loans. This increases the overall cost of borrowing and may potentially lead to financial strain for some borrowers.
- Larger Down Payment- As a way to offset the risk of subprime mortgage loans, many lenders require high down payments–sometimes up to 25% to 35%, depending on your circumstances.
- Long Loan Terms- A traditional mortgage loan usually ranges from 15 to 30 years. However, a subprime mortgage loan may stretch the repayment period to 40 or even 50 years. This means you’ll be paying it off for a long time and with a lot of interest.
Find the Right Lender for Your Project Today
If you want a real estate loan but have poor credit, you may explore options like subprime mortgage loans or hard money loans. However, it’s important to know the differences between the two and choose the option that works for your scenario. If you’re looking at a real estate investment, a hard money loan is for you. On the other hand, if you’re looking to buy an owner-occupied home, you may look into a subprime loan.
Do you need a reliable hard money lender for your next real estate project? Look no further than Maryland Hard Money Lenders. Our team of experienced real estate professionals can help you quickly get the funds you need with reasonable terms and conditions. Contact MHML to learn more about our lending process, and fill out our initial hard money loan application today!