The terms hard money and private money loans are often used interchangeably.
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But they are different and borrowers will want to understand those differences before they seek them out.
Whether you’re a house flipper or you have a unique financial situation and want to purchase a house, both loans can help you. But which is the right one for you?
Let’s dive into the specifics of hard money and private money, their differences, and how you can get one of these loans to finance your property.
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What is a hard money loan?
Hard money loans come from designated funding firms, so they’re easily found by searching. These firms are organized and licensed to lend out money.
Though hard money lenders are usually open to negotiating, they’ll still have some requirements, rates, and terms of the loan. They’ll often take on loans that are too complex for banks or other lenders.
Hard money lenders also work with private investors. These loans often have higher interest rates so that they can make a profit once everyone else is paid out. Working with a hard money lender is like having a professional between you and a private investor who will coordinate the process.
What is a private money loan?
Private money loans come from private individuals. This can mean a private financier, family member, friend, or other acquaintance. Even a business can provide a private money loan if they think they’ll see a financial benefit from it.
Because private money loans are simply from private citizens, the loan may not be as organized as it would be if it came from a hard money lender. Working directly with a private money lender cuts out the middle man of hard money lenders, but also cuts out the work they do in coordinating the deal.
When you borrow from a private funding source, all terms are determined between you and the source. This may get you a more favorable interest rate or repayment terms but it’s also up to the borrower to navigate everything. Especially if the borrower has a personal connection with the private lender, they should be careful not to damage the relationship with miscommunication or a deal gone wrong.
What’s the difference between the two loans?
Hard money loans can technically come from private sources but the two loan paths are different routes with their own pros and cons.
Public versus private
You can think of hard money lenders as public or more “mainstream” sources of funding. They’re easily found and probably looking for new clients.
A private money loan is exactly what it sounds like — from a private source. They might not be as eager to advertise their willingness to loan funding.
Hard money lenders are usually lenient with their qualifications — they’ll want to see that you have a plan to pay the loan back but may be willing to overlook credit or income issues. They’re more likely to work with repeat customers if they see that you know what you’re doing.
They’re also looking at the value of the collateral that the borrower is putting up. For example, they’ll look at the value of the property that a borrower hopes to flip. If the borrower defaults on the loan, the hard money lender can fall back on that property.
Again, since private money lenders set all of their own terms, that may be the easier route for someone without experience in flipping houses, for example. Or for someone who doesn’t necessarily have an established plan to pay the loan back.
Borrowers take a gamble in working with a private money lender.
A hard money lender is licensed, accessible, and can be held accountable for any mistakes or other issues with the loan.
Private money lenders don’t have the same checks and balances, so it is a risk for the borrower to work with them just as much as it’s a risk for private lenders to loan the money.
How to find hard or private money loans
Another difference between the two loans is how to access them.
The working relationship between the borrower and the private source is usually found through networking. This could be someone the borrower already has an established working relationship with. Or they’re someone that they intentionally sought out for a specific project.
Hard money lenders are often more accessible. They can be found by searching online and you don’t need to have worked with them before, though it helps. They’ll have more visibility as they want to find new clients to work with.
A private money lender may or may not have loaned out funds or worked on any projects before. So they could be spreading the word that their funding is available or they could be entirely new to it.
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