Learn The Difference Between Private Money And Hard Money Loans

When it comes to understanding the difference between hard money loans and private money loans, it’s understandable to have many questions. But fortunately, when it comes to real estate, the two terms are often used similarly. Let’s take a closer look:

In the real estate investment industry, a hard money loan refers to a loan that is not regulated by the government or other financial institutions or organizations. When buyers talk about taking out a “private loan”, they are generally referring to a hard money loan.

Why Are They Called “Hard Money” Loans? 

Unlike traditional conventional loans, which require specific income levels, credit scores and other types of eligibility requirements, hard money loans look at the LTV or “loan to value” ratio. This is the amount of equity that the borrower has in the property.

Generally speaking, borrowers can be approved for hard money loans when their LTV is 70% or lower. The lower the LTV, the better, since it demonstrates to potential lenders (in lieu of income and credit requirements), that their risk is low and there’s less of a chance that the borrower will default on the loan.

Private Money Lending vs. Hard Money Lending 

Although the terms “private money loan” and “hard money loan” are used interchangeably in the real estate industry, the actual lenders behind them may be different. To an investor, a “private loan” could be a loan from a family member or friend, whereas a hard money loan is almost always from a real estate lending agency.

In addition to having more money to lend in the first place, a hard money loan from a trusted lender gives borrowers many more options. Whereas banks aren’t in the business of real estate, and typically won’t approve a loan application for a property that’s going to be used as a “fix and flip” or "commercial loan", hard money lenders are much more accommodating and open to the idea.

And let’s face it, private money loans from family and friends, especially for properties in need of repair, are few and far between. Going with a hard money lender opens up much more potential to get the financing necessary to make those repairs and resell the property for a profit.

So Why Doesn’t Everyone Forego the Bank and Get a Hard Money Loan? 

Although hard money lending is increasing in popularity -- especially among prospective buyers who cannot meet the bank’s strict eligibility requirements, there are still some points to keep in mind. For one, because the standard requirements for getting a hard money loan are lower, the risk of default is higher, and therefore, the standard interest rate charged by the lender may be higher than traditional bank interest rates.

However, with this point in mind also comes the ability to get approved and close on a property faster. For homes that are in competitive, high-demand real estate areas, a hard money loan can give you an inside track to getting approved faster. This is precisely because there’s much less paperwork involved.

Hard money lenders don’t need to wait for the lengthy approvals process to go through to check things like income verification, credit reports and so on. Because they look squarely at equity, hard money loans can be approved quicker, and buyers are able to make an offer on a property with the financial backing they need to stand out from the crowd.

Approval Process Can Take Only 24 Hours

Of course, that begs the question -- if the approval process is fast and there’s far less requirements needed, why doesn’t everyone just forego the bank and get a private loan directly from a hard money lender?

The main reason is because most people don’t realize that hard money lending and private loans are even a possibility. It has become a well-known process that in order to get approved for the money you need, that you go to the bank, get treated like a number, and hope for the best.

Private money lenders are invested in your success. Rather than simply rubber stamping every application that comes across their desk, or tying up the process by requiring reams of paperwork, private hard money lenders understand that everyone has unique and individual needs which may require more creative financing solutions than what a bank can provide.

This customized, one-on-one process allows prospective buyers the freedom and flexibility they need to secure financing through a trusted source, with interest rates and a time frame that makes sense for their unique needs. It allows buyers the ability to shortcut the loan approval process and get the edge in ultra-competitive markets.

If you’re interested in learning more about hard money lenders or hard money loans, call us today and let’s discuss more about your specific needs. We’d be delighted to work with you on helping you get the financing you need at a reasonable rate, in far less time than the traditional loan approval process.