Hard Money Loan vs. Conventional Mortgage: Key Differences

Hard Money vs. Conventional Mortgage: Which is Right for You?

When financing real estate, you have two primary paths: conventional mortgages from banks and hard money loans from private lenders. Understanding the differences helps you choose the right tool for your investment strategy.

The Fundamental Difference

Conventional mortgages focus on the borrower—your credit score, income, employment history, and debt-to-income ratio determine approval.

Hard money loans focus on the property—the real estate's value and your exit strategy are the primary factors.

Detailed Comparison

Speed of Funding

When speed matters: Hard money wins. If you're competing against cash buyers or facing a deadline, hard money's speed can make or break the deal.

Credit Requirements

Hard Money:

●Minimum scores vary (often 600+)

●Recent credit events may be acceptable

●Focus is on property equity and exit strategy

Conventional:

●Typically requires 680+ for best rates

●Recent bankruptcies or foreclosures are disqualifying

●Strict debt-to-income requirements (usually under 43%)

Income Documentation

Hard Money:

●Often no income verification required

●No tax returns needed

●Self-employed borrowers welcome

Conventional:

●2 years of tax returns

●Pay stubs and W-2s

●Employment verification

●Complex self-employed documentation

Property Requirements

Hard Money:

●Can finance properties needing renovation

●No minimum condition requirements

●Construction and land loans available

Conventional:

●Property must be move-in ready

●No deferred maintenance

●Must meet appraisal standards

Loan Terms

Hard Money:

●6-24 months typical

●Interest-only payments

●Balloon payment at term end

Conventional:

●15-30 year terms

●Amortizing payments

●Long-term stability

Interest Rates

Hard Money:

●9.99% - 14% typical

●Higher but shorter duration

●Total interest paid may be less due to short term

Conventional:

●6% - 8% typical

●Lower rate over longer term

●More total interest paid over loan life

When to Choose Hard Money

✅Investment properties that need renovation

✅Time-sensitive deals where speed wins

✅Bridge financing between transactions

✅Properties banks won't finance (condition issues)

✅Complex borrower situations (self-employed, multiple properties)

✅Short-term holds (flip or refinance within 1-2 years)

When to Choose Conventional

✅Primary residence purchase

✅Long-term buy-and-hold investments

✅Move-in ready properties

✅When you have time (no closing deadline pressure)

✅Strong traditional qualifications (W-2 income, high credit)

The Hybrid Strategy

Many successful investors use both:

1. Acquire with hard money (speed to win the deal)

2. Renovate with hard money construction draws

3. Stabilize the property (rent it or prepare for sale)

4. Refinance to conventional for long-term hold, OR

5. Sell and repay the hard money loan

This "BRRRR" strategy (Buy, Rehab, Rent, Refinance, Repeat) leverages hard money's speed and flexibility while eventually capturing conventional rates for long-term holds.

Cost Comparison Example

Let's compare a $500,000 property purchase:

Hard Money (12-month hold)

●Loan amount: $375,000 (75% LTV)

●Rate: 10%

●Points: 2 ($7,500)

●Monthly interest: $3,125

●Total cost over 12 months: ~$45,000

Conventional (same property, 30-year)

●Loan amount: $400,000 (80% LTV)

●Rate: 7%

●Monthly P&I: $2,661

●First year interest: ~$27,800

●Total interest over 30 years: ~$558,000

While hard money costs more per year, the short duration means total dollars paid can be far less—especially if you sell or refinance within a year.

Making Your Decision

Ask yourself:

1. What's my timeline? Short-term → hard money. Long-term → conventional.

2. What's the property condition? Needs work → hard money. Move-in ready → either.

3. How are my qualifications? Non-traditional → hard money. Strong W-2 → conventional.

4. What's my exit strategy? Clear and quick → hard money works. Uncertain → conventional safer.

The Bottom Line

Neither option is universally "better"—they're different tools for different situations. The savvy investor understands both and uses each when appropriate.

Hard money excels at capturing opportunities that require speed or don't fit conventional boxes. Conventional mortgages excel at long-term, low-cost financing for stable properties.