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Understanding Hard Money Versus Private Lending

You’ve found the perfect piece of real estate but need a loan, and fast, to help close the deal. Your bank isn’t interested; so, where do you turn next? For most real estate investors, it’s going to come down to hard money vs. private lending, or even both. But before you pick either route, it pays to understand the difference between the two.

What is a Hard Money Lender?

Hard money lenders operate as a loan company and are licensed to do so. They’ll present certain criteria for lending money and terms that will be spelled out usually in the form of a high loan rate over the short-term. That said, they’ll provide greater flexibility than a bank and consider clients banks might have turned down. Hard money lenders emphasize collateral as their primary means of payback. In fact, they generally lend monies with the notion they’ll acquire the property to produce a bigger profit.

Hard money isn’t subject to traditional credit guidelines. Fees are often presented in the form of three to five points and represent an upfront charge for the loan. There are typically two caveats. First, hard money lenders rarely fund an entire deal, usually 70 percent. Second, they prefer short terms generally a year or less.

What is a Private Money Lender?

Private lenders, on the other hand, are simply people with the means to invest capital. Like hard money lenders, private lenders will often take a risk that your bank won’t because of bad credit history or the bank just being uncomfortable with your project.

What private lenders will deliver, more so than banks or hard money lenders, is speed, flexibility, and efficiency. Those elements typically manifest themselves in the form of term-length and a willingness to negotiate, even be creative, with you on the terms. Equally important, if you need money fast, private lending is a great option. Private money lenders emphasize credit, the quality of the property, and repayment more than collateral. Collateral is usually seen as a last resort for repayment.

How Do They Differ?

To understand some of the key differences between hard money lenders and private lenders take a look at the chart below.

Private Money LenderHard Money Lender
CreditReliance on credit history, debt-to-income ratio, financial condition and borrower experienceReliance on collateral as the primary source and not credit or debt-to-income ratio
Ability to PayReliance on income and cash flow along with debt to income ratio and/or project feasibilityLess reliance on income and assets with a focus on collateral
CollateralGenerally considered a backup with the ability to repay more important Considered the primary source of repayment if the borrower fails to pay
FlexibilityMore willing to negotiate terms and issues; welcome repeat businessMore strict as collateral is what matters most; less willing to negotiate with concessions
TermsMore expensive than traditional lenders; generally more favorable terms and more tailoredMore expensive than traditional lenders; less willing to tailor terms
Property TypePrefer properties with market demandMore flexible on property type and location

So Which Lending Source is Better?

If you’re looking for money fast without the strings attached inherent with traditional lenders, both hard money and private lenders can work. Both have some similar aspects when it comes down to speed, simplicity, and creativity.

But if you’re looking for a partner that has your success in mind, private lending should be your preferred route. That’s why we’re here. We can get you the money you need, get it to you fast and get it to you with terms that have your interests in mind. And when your project is successful, we’ll be there the next time you have a borrowing need. Call us today. Let’s make something happen that benefits us both.