These days, I get at least one customer a day asking me for "soft money loan". It's like the buzzword for 2014. Not only does "subprime" lending not exist anymore, but it isn't politically correct to even say. Hard money is my main business, but we started providing soft money loans to our clients in 2013, and now demand has grown considerably.
First of all soft money means that the terms and conditions of the loans are "softer" than hard money. Hard money got its name because it is secured by "hard" collateral, not because it is hard to get, hard to pay back, or because it has hard terms. Since terms on hard money have historically been set around 12% and 3-7 points with a one year term, a soft money loan would have terms that are easier, such as 5-10% rate, 1-3 points, longer terms, amortized over 15-30 years, with 5/1 arms, 7/1 arms, and 10/1 ARM pricing.
Contrary to what is written on the internet, hard money loans are NOT harder to qualify for, soft money loans are. On both, the down payment requirements are very strict, starting at 30% and going up from there. Typically the absolute maximum loan to value for hard money in Nevada is 70% LTV - and the LTV is based on the LOWER of the purchase price or appraised value, not the "after repair value". Nevada lenders very, very rarely use this form of pricing, as opposed to California lenders, where it is more popular. You would think that soft money would have easier down payment requirements, but that isn't so. We have found that soft money usually comes with higher down payments - sometimes up to 50 or 55% of the purchase price, and again, rarely on after repair value. Our soft money starts at 4% interest rates, 30% down payments, and 5, 7, and 10 year fixed rates, amortized over 30 years. It is the interest rate that is so attractive, but because of overlays (condo, LTV, credit score, loan amount) the typical rate usually ends up to be 6-7%. For someone who is used to paying 12% for their hard money, this is a huge benefit to convert their loan to soft money. However, the loan amount must be at least $150k.
Since the loan amounts are higher, the rates lower, and the terms much longer than hard money, there can be a prepayment penalty involved - up to two years - and there may be a cost to eliminate the prepayment penalty on soft money loans. We don't charge any prepayment penalty on any of our hard money loans - whether investment or owner occupied - as we don't like telling a borrower when they can pay off the loan. Therefore, it makes sense for investors who are doing long term holds for rentals to use soft money, and investors who are flipping to continue using hard money.
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