If you’re used to the traditional mortgage market, you can be forgiven for not knowing the difference between a “hard money loan” and a “private loan.” Both of them sound a little sketchy … maybe even a little threatening.
The truth — hard money loans and private loans have some similarities, but also some key differences. Experienced real estate investors know the value of both sources of funding.
What Is a Hard Money Loan?
Admit it — it sounds a little scary, like the lender is going to bring a baseball bat to collect.
But there’s no reason to be scared of hard money lenders. Far from being shady institutions, hard money lenders are legitimate, organized businesses. They may advertise on billboards and in magazines. You can Google-search them and will find many reputable companies. You may also find smaller hard money lenders and willing to lend funds to local real estate investors.
Hard money lenders are just another category of lender. They are usually licensed, answer to regulatory boards, and are required to adhere to ethical standards. Some however may not be licensed and they are able to work around that requirement by not lending to residential owner-occupants.
The difference? Hard money lenders are not banks, and as such are not allowed by law to lend money they don’t have. Every loan a hard money lender agrees to has to be backed with “hard money” — that is, money the company actually has in its account.
Hard money lenders aren’t trying to conform to the guidelines needed for the loan to be guaranteed by Fannie Mae, Freddie Mac, or another agency tasked with insuring long-term loans. As such, they have a lot more leeway — both in terms of who they can lend to, how fast they can write loans, and what kinds of terms they offer.
The typical terms hard money lenders offer include:
- Anywhere from 3 to 12-month repayment terms, though sometimes the term can be extended.
- Interest-only repayment terms. Balloon payment is due at the end of the short loan term.
- Interest rates ranging from 10% to 18%, depending on market interest rates, and experience level of the investor.
For people used to long-term homeownership loans, those interest rates might sound criminal … but consider the short terms of the loan. It’s a lot of interest, but only over a short period of time. Hard money loans are popular for “fix-and-flip” projects. When executed properly, the profit margin should more than justify the higher interest rate.
What Is a Private Loan?
A private loan is simply a loan from any individual or group of individuals who aren’t licensed lenders, organized as a business for the purpose of lending. This doesn’t mean there are no rules — certain laws and regulations apply to all real estate loans. But private lenders have far fewer regulatory hurdles to clear than hard money lenders.
A private lender could be a friend, family member, colleague, someone you met at a party … anyone with some money to lend. They don’t advertise — you usually find them in your network or meet them by networking.
Similarities Between Hard Money Loans and Private Loans
- Fast Funding. Whereas a conventional lender will take weeks or even months to fund a long-term loan, both hard money lenders and private lenders can act quickly, sometimes funding their loans in as little as seven days.
- Less Emphasis on the Borrower’s Personal Credit. Hard money lenders and private lenders tend to focus on the quality of the deal. Yes, the character of the borrower matters, but they are less likely to see an imperfect credit score as a dealbreaker and may not even pull credit.
- Secured By Real Estate. Both types of real estate loans are secured by real estate. Just like a conventional mortgage loan, a deed of trust is recorded to establish the subject property as collateral for the loan.
- Higher Interest Rates and Fees. Beware of sticker shock. If you’re used to conventional mortgages, both hard money loans and private loans may have interest rates and origination fees that exceed your usual comfort zone.
- Easy to Find. Hard money lenders advertise their services. If you’re new to the game and don’t know a lot of private lenders, a hard money lender can help you get your start.
Pros of Hard Money Loans
- Legitimate Company. With a hard money lender, you have the comfort of knowing that you are dealing with a licensed business that has a lot to lose by dealing dirty with you.
- Streamlined Process. A private lender may not lend money like a well-oiled machine. Hard money lenders have processes that rival any bank in terms of efficiency and ease of use.
- Experienced Set of Eyes. Hard money lenders are usually experienced, especially in the kind of fix-and-flip deals that form their bread and butter. First-time flippers may find their hard money lender to be a valued mentor and partner. At the very least, their professional opinion of the deal could convincingly validate your strategy.
- Flexible Terms. Private lenders are allowed to lend their money on whatever terms they want. If you find an enthusiastic lending partner, you may be able to get 100% financing, favorable interest rates, and even delayed payment terms.
Pros of Private Loans
- Few Rules. Because they aren’t licensed, private lenders have few hoops to jump through. This can result in a faster, more amicable lending process. If you both like the deal, you can get it done.
When searching for a Frederick, MD area Hard Money Lender or Private Lender make sure you do your research and talk with your financial consultants on which option may better suit your needs. For more information or to walk you through how to find a local Frederick lender, feel free to contact UTZ Property Management. firstname.lastname@example.org