Getting a favourable loan is a necessary part of securing investment properties. But some lenders see flipping as a risky proposition, especially for those new to real estate. If you’re looking to buy a property to renovate, they may either pass or offer you what’s known as a hard loan.
What about soft loans? These are often touted for property flippers because their terms are more favourable. Can you find them here in Ontario?
Soft Loans vs. Hard Loans
Because many institutions have biases against house flipping, they will only offer hard money loans to those new to the business. Most hard money lenders accept a property to back the loan and will pursue the asset’s value should the borrower default. This can scare off many flippers and hold up a lot of great opportunities!
A soft loan gives the lendee a below-market interest rate and several years to pay off the loan. Some lending and financing institutions, such as banks and credit unions, offer them to those who have solid credit and suitable proof of income to be approved. One of the differences between soft money and hard money is interest rates. In general, soft loans have much lower interest rates, whereas the rates for hard money loans are higher than traditional mortgages.
Whatever the circumstance, you may be able to negotiate more favourable terms with the lender. Hard money loans are often short term and, if you must extend the timeframe or if you pay it off early, will make you pay penalties.
Where Can You Find Loans?
Some flippers use soft money loans that have loan-to-value ratios that can go up to 90 percent. As such, getting one of these loans is a lengthier process than getting a hard loan, and the lender will take credit scores and histories into account. To get a great soft loan, you also may have to prove that you have several months worth of payments saved up.
They are also more difficult to secure. In Ontario, you are much more likely to get approval for a hard money loan, but that doesn’t mean you should give up! Hard money is often borrowed by investors who are looking to buy and renovate a property when soft loans aren’t offered. It’s like a shorter-term loan backed by the property itself rather than the borrower.
No matter what the terms, once you’ve acquired a loan from an institution and pay it off in good standing, you can find yourself doing business with them on another flip. This is great because you’ve solved one of the more difficult parts of property flipping. If you’d like to learn more and see how you can turn any loan into a good opportunity, get in touch with the MJS team!