Hard money vs private money loans: how to choose?

If you’re looking for creative ways to finance your next investment property, you’ve probably debated hard money versus private money. The topics of hard money and private money can be quite complicated. It’s even hard to pin down the definitions.

The reality is that there are no hard and fast rules about how the terminology is used. There are popular views that have been proclaimed loudly and repeatedly, making them appear to be the real answer. However, nothing has been officially agreed upon. “Hard money” is simply calling a convention for someone who lends money in the short term, usually at a higher interest rate. “Private money” often refers to a family member or friend… but it doesn’t have to be.

While there are a few guidelines for understanding hard money versus private money, keep in mind that practices vary by region.


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What is hard money?

Like a traditional mortgage, a hard money loan is a loan that is backed by a hard asset. These assets are tangible, such as real estate, vehicles, equipment, gold or silver, although they are often real estate. Therefore, a hard money lender is a lender that uses the value of the underlying property to determine the loan amount and rate.

There are very few real money lenders left. Most of them ask for FICO scores, tax returns, or other indicators traditionally used by conventional lenders.

So what should you look for when choosing a hard money loan over a conventional loan?

Advantages of hard money

  • More flexible with fewer criteria to meet – perfect for buying a distressed flip
  • Get loan approval faster
  • May not require a deposit

Disadvantages of hard money

  • Higher costs and interest rates
  • Lets you risk losing your property/collateral

What is private money?

On the other hand, there is private money, and that’s exactly what it sounds like. It is money lent by a private individual or organization for a purchase. As such, the terms vary widely. Private sources of money can use whatever criteria they are comfortable with in “qualifying” the person or entity they are lending to. It can be as basic as, “I’ve known you since you wore diapers, so I trust you.”

Before looking for a wealthy relative, you should know the pros and cons of private money loans.

Advantages of private money

  • Fast approval with more flexibility
  • No minimum credit score
  • Enables rehabilitation financing

Disadvantages of private money

  • High fees and interest payments
  • Shorter payback time
  • Possible negative consequences for your relationship

Neither hard money nor private lenders are restricted by banking regulations because they are non-institutional. But both institutional and non-institutional lenders must comply with all lending laws, so there is no free pass for hard money or private lenders.

Examples of Private Money vs. Hard Money

Let’s look at two clear cases.

Case 1: Your grandmother believes in you and wants to lend you money against a down payment. She would never lend to anyone else and won’t charge you much. She is clearly a private lender.

Case 2: A company or person that advertises as a lender is: clearly a hard money lender. There should be no confusion.

Now let’s look at two not so obvious examples.

Case 1: Your dentist has known you for years and has several investment properties of his own. He has lent money to another client, also a real estate investor, and is willing to finance your deal. However, he does not want you to advertise his services to others. He is a private lender – not available to the general public.

Case 2: Take that same dentist, but now his broker is lending him deals. He wants more customers and wants you to spread the word. He would be considered a hard lender as his pool of borrowers can be anyone who meets his criteria, not just friends and family.

More about other people’s money from Pyjama People

Is it hard money or private money?

By looking at these two factors, you can determine whether someone is a lender or a private lender.

  • Rates and conditions: If the rates and terms are similar to other lenders, consider them a lender. If not, they are probably a private lender.
  • To advertise: If they advertise, or come up with a real estate group and announce they are borrowing, think of them as a lender. If they don’t advertise or want you to promote their services, they are probably a private lender

However, there is no hard and fast definition of a private lender versus a hard money lender. In fact, any non-institutional lender can call themselves a “private lender,” that is, if they choose to be defined as “non-institutional.”

But in today’s common usage, a lender advertises its services, has a process for qualifying loan applicants, and is available to any borrower who meets the established criteria. A private lender, on the other hand, is someone you know who does not lend to the general public and may charge less than the local rate.

Don’t be fooled by lenders calling themselves private lenders just to sound cheaper or less scary. You can call yourself the president of the United States, but that doesn’t make it so. Evaluate each lender based on your needs, their reputation and their ability to deliver what they say.

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