Determining creative ways to fund your next real estate venture has probably made you seek more information on hard and private money loans. These types of loans are often used in lieu of traditional bank loans due to the flexibility, quick approvals and ability to borrow 100% of the costs. However, it is important to be aware of the differences between private and hard money loans before making your financial decision. Below, we will compare these two types of loans to help guide you through your next real estate investment.
What is a Hard Money Lender?
A hard money lender is often referred to as an asset-based lender that uses the value of the property to determine the loan amount. This type of loan is collateralized by real estate. A company that provides hard money loans is licensed, whereas private money loans do not need to necessarily follow certain guidelines (and can vary from person to person).
Pros of hard money lending
- Knowledge/Organized – Choosing a hard money lender gives you an opportunity to work with a company that is licensed. These organizations typically have more experience when it comes to issuing loans.
- Flexibility– Criteria is not hard to meet therefore ideal to purchase a distressed property.
- Quick approval – Since the criteria is not that difficult to meet, this speeds up the process for quick funding.
- Guidance – A hard money lender acts as a second set of eyes and an extremely beneficial, especially to newer investors.
Cons of hard money lending
- In some cases, the fees and interest rates may be higher.
- Property is used as collateral.
What is a Private Money Lender?
Generally, a private money lender can be a single person or a group of people who loan you money based on their own terms. This type of loan may come from a family member, friend, or business that believes in your investment and is hoping for some sort of return. Unlike hard money lenders, these types of loans do not have a general set of guidelines or criteria. The terms can vary and are usually determined by you and the private money lender. Since these types of lenders can essentially be anyone, they may not be the as experienced as hard money lenders.
Pros of Private Money Lenders
- Leverage – Most of these loans offer up to 100% financing
- Quick Approval – Since there are less guidelines and criteria, funding can be received very quickly (7 days).
- No minimum Credit score – In most cases credit is not the primary factor that is considered for approval which gives you an opportunity to receive funding where other lenders would not be able.
Cons of hard money lending
- Shorter payback period
- High fees and interest payments
How to Distinguish Hard money lenders and Private money Lenders
Below is a table that clearly outlines the major differences between hard and private money loans.
| Hard money Lenders |
Qualifications VS |
Private Money Lenders |
| For the most part, hard money lenders are experienced and licensed. This allows you to not only receive funding but guidance. | Knowledge/Experienced | Private money lenders can essentially be anyone with funding, regardless of knowledge or experience with loans. |
| When it comes to hard money lending, the organization has a streamlined process. The loan will vary based on your property and other factors, but the process mostly remains the same. | Organization and general processing | In general, the terms of the loan will vary from loan to loan. As a result, this can make things unorganized and troublesome in some cases. |
| Hard money lenders advertise and are promoting their services | How investors are found | Private money lenders are more exclusive, typically relying on referrals. These investors are not actively promoting funding to the public. |
Which loan is best for my real estate investment?
Choosing the right loan will depend on your needs for the underlying property. Our hard money lenders can gladly navigate you through the many factors to consider and suggest some options based on your investment venture. Feel free to reach out to our experts today!
You can contact us online, reach our Houston office by phone at (713) 680-8100, or call us in Dallas at (214) 492-0100.
