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What is a Soft Money Real Estate Loan?
At its most basic definition, a soft money loan (SML) is a hybrid of sorts, which combines features of traditional conventional lending with those of hard money loans (HML). SMLs are an especially relevant form of funding for income producing properties.
SMLs are asset-backed, so you are required to back your loan with collateral, which protects the investors should you default on your loan. Unlike an HML (Hard Money Loan), however, your credit worthiness plays a larger role – in fact, to qualify for most SMLs your credit score needs to be better than a 580. It is also a good idea if you have bad credit, to show lenders proof of measures you have put in place or actions you are taking to improve your credit rating.
With HMLs and SMLs, lenders are more willing to take a risk on you than banks or other traditional lending institutions, but they want to be sure you are worth that risk. In addition to demonstrating your credit worthiness, you'll also need to show that you have 3-6 months worth of loan payments in reserve. That means it needs to be either cash or a liquid asset that you have immediate access to.
When it comes to the amount of funding an investor might qualify for with an SML, the loan to value ratio (LTV) comes into play. LTV is a term that lenders use to define the ratio of a loan to the value of an asset to be purchased. Unlike an HML, which only funds up to 65% of LTV, SMLs often fund up to 90% for new purchases or 80% for refinances (non-owner occupied residential)
Like HMLs, funding for soft money loans is often provided by private investors, so closings often occur much more quickly than conventional loans. The average SML closing happens within 10-14 days, versus 3-5 days for HMLs or 30+ days for conventional loans.
By now it should be relatively clear that SMLs are probably the best funding resource for most real estate investors. With closing times faster than conventional loans, higher LTV's than both traditional and HMLs, and relatively low credit score requirements, soft money loans offer the most opportunity to investors.