Hard Money Lenders vs Private Lenders

Hard Money Lenders vs Private Lenders

June 8, 2022

Produced by:
Carmel Woodman

With over 8 years of expertise, Carmel brings a wealth of knowledge as the former Content Manager at a prominent online real estate platform. As a seasoned ghostwriter, she has crafted multiple in-depth Property Guides, exploring topics such as real estate acquisition and financing. Her portfolio boasts 200+ articles covering diverse real estate subjects, ranging from blockchain to market trends and investment strategies.

A brief outline

Hard money loans and private loans can sound quite similar, however there are some fundamental differences. If you’re trying to decide which creative financing solution is right for you, we’ll the outline the difference between hard money lenders vs private lenders below.

Table of Contents

For real estate investors looking for an alternative way to get funding for a property deal, hard money loans and private loans are both an option. Getting a traditional loan to flip a house or buy a rental property can be difficult, so creative financing options may be your best bet. If you’re trying to decide which option is suited to you, we’ll help you make your decision by looking at hard money lenders vs private lenders and what the benefits and drawbacks to each are.  

What is a hard money lender?


Hard money lenders provide short-term loans to those who are investing in real estate in various capacities. Whether it be rental properties, fix and flip properties or building from the ground up, hard money lenders provide loans for a variety of residential and commercial real estate projects, and even land purchases in some cases.

Hard money lenders do not abide by conventional loan regulations as they are provided by individual lenders or private companies who aren’t part of a financial institution. They are asset-based lenders, so the property itself is used as collateral for the loans.  

Hard money lenders are typically less concerned with the borrower’s credit history and more interested in the real estate deal itself. Which makes them able to offer fast funding to borrowers because there’s less red tape than traditional loans. Hard money lenders aren’t institutionalized and can therefore make their own loan approval requirements.

Hard money lenders can provide 60% to 80% of the after-repair value (ARV) of a property. They will gather their funds from a variety of sources, including private individuals, and the investors will often receive a higher rate of return due to the riskier nature of the investment. To mitigate this risk, hard money lenders charge higher interest rates on their loans.

What is a private lender?

The term “private lender” refers to a wealthy individual or a private organization that provide loans to people. These lenders don’t use the traditional lending criteria because they are not affiliated with any financial institution, such as a bank. Which means that lending can be more flexible, in fact private lenders don’t subscribe to any particular set of loan terms and criteria and can do as they please when it comes to lending.

Private money loans are also asset-based loans focused less on the borrower’s financial standing and more on the property or deal itself. Private lenders are not organized lenders and are usually not licensed to lend money, whereas hard money lenders are.

An example of a private lender is a family member who has enough money to help you fund a property purchase, or a wealthy individual that you’ve met that is going to help fund your next property purchase with repayment terms in place. Private lenders can quite literally be anyone, and their lending criteria can be anything they choose.

Hard money lenders vs private money lenders - What's the difference?

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The main differences between hard money lenders are private money lenders are:

  • Loan terms: Hard money lenders have stricter lending criteria than private money lenders. Hard money lenders will generally stick to certain rules around the points, interest rates and terms of the loan, whereas private money lenders can be flexible on every aspect of the loan.
  • Licensing: Hard money lenders are licensed to lend money, whereas private money lenders are not usually licensed to lend money.
  • Locating the lender: Hard money lenders are easier to find than private lenders, because they’re widely advertised. Whereas private lenders don’t typically advertise themselves, so finding one can be more of a challenge and they will more than likely need to find you or be found by referral.

Advantages & disadvantages of using a hard money lender




Advantages & disadvantages of using a private lender



Hard money lender or private lender - Which should you choose?


Using a hard money lender

There are 3 types of borrowers who would generally use a hard money lender to fund their projects:

1. Real estate investors who are flipping houses and need access to funds quickly.

These types of investors will get a fix and flip loan with hard money lenders and generally pay the interest only for the duration of the loan until the end where a balloon payment is due for the principal amount. This option suits house flipping investors well, as they only need to pay off the interest while they are repairing and renovating the house, and they can then sell the house to make the balloon payment. Hard money loans offer fix and flip investors the opportunity to get funding fast, which can help them beat the competition.

2. Rental property investors who are buying properties to rent out to tenants.

 Those who are buying properties to rent out, will often need enough money to purchase the property and potentially renovate it, but they will likely be able to pay the loan back over a longer period. Hard money lenders don’t only do short-term loans, they can also offer long-term loans for this particular purpose. For example, New Silver offers a 30-year fixed loan for rental properties.

3. Developers who are doing ground-up construction projects.

 Developers who are building properties may need hard money loans to get their project off the ground. These can come in handy for a cash injection to get a project started. These loans can be an easier option for builders who need fast access to funds with no hard credit pull.  

Using a private lender

Anyone who needs money for a particular venture can use a private lender. In the case of real estate investing, this could be anything from fix and flip to buy and hold strategies. Private lenders don’t advertise, so this type of lender is usually found by referral. If you’re in need of funds for a real estate project, and you’re unable to get a traditional due to bad credit or any other reason, private lenders could be a good solution for you.

Final thoughts on hard money lenders vs private lenders

Before you sign on the dotted line for either loan type, make sure that you’ve done your homework to determine which loan is best suited to your real estate needs. Each lender is different and weighing the risks against the benefits is the best way to determine which type of lender is the best solution for you.  

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