Hard money loans are asset-based, with underwriting decisions primarily focused on the equity or value of the property in which the loan is being made. These loans typically come from private lenders using their own capital and are commonly used for investment properties.
Hard money loan advantages include quick closing timelines (typically one week), minimal documentation requirements, and flexible qualification criteria set by individual lenders rather than government standards. Disadvantages include higher costs due to private lenders determining their own interest rates, and lenders establishing their own repayment terms, requiring borrowers to carefully review agreements.
Conventional or conforming loans adhere to Fannie Mae and Freddie Mac guidelines. These standardized mortgages can be sold on secondary markets, enabling lenders to offer more competitive rates. Advantages include the lowest interest rates available for primary residence purchases and regulatory protections against predatory lending practices. Disadvantages include strict borrower requirements including strong credit scores, documented income history (1-2 years), and low debt levels, extended processing timelines (approximately 60 days), and required property appraisals.