Hard Money Vs Private Money Loans For Real Estate

What’s the difference between hard money and private money loans? Real estate investors sometimes use these terms interchangeably. Many hard money lenders are private lenders, and vice versa, making the discussion more confusing. Fortunately, understanding the differences between these two real estate terms is easy enough. 

In this article, you’ll learn how:

• Hard money lenders are asset-based lenders that specialize in short-term purchase-rehab loans to real estate investors. Private lenders include any private individual who lends money for any reason. 
• Hard money loans cost far higher interest rates and fees than traditional mortgages. While hard money lenders look at the property first and foremost, they still check borrowers’ credit scores.
• Real estate investors looking into getting either of these two loans needs to weigh their pros and cons and choose one that’s most appropriate for their specific circumstances. 

The Differences Between Hard Money vs. Private Money

Hard money lenders are in the business of lending money. They actively market to real estate investors and want your business. 

In most cases, private money lenders haven’t built a business around lending money. If you borrow money from your sister, it counts as a private loan. 

We’ll discuss them further in more detail, but for a quick look, here’s a summary of their differences:

Private Money Loans Explained

Any loan you borrow from a private individual counts as a private money loan.

Generally, when real estate investors talk about borrowing money privately, they mean borrowing money from people they know personally. Friends, family, colleagues, neighbors—anyone they know willing to lend money for their real estate deals.

That said, owner financing counts as a type of private loan. You borrow money from a private individual, which involves negotiating seller financing.

How To Get A Private Loan

The simplest way to get a private loan is to ask people you know personally. You can also attend real estate conventions, online platforms, and other networking events to look for potential investors. 

Unlike institutional lenders, a borrower’s qualification is often a secondary consideration. And like with qualification, there are no “typical” or “standard” amounts, interest rates, fees, or other pricing for private money loans. 

Borrowers loan and pay whatever they negotiate with the individual lending them money, which often depends on their relationship with the lender. Similarly, down and interest payments depend on how the discussion goes.

As such, private loans offer ultimate flexible funding without the rigid rules of a financial institution and lending laws. 

What Are Examples Of Private Money Lenders

As mentioned, private lenders usually include the borrower’s personal acquaintances or family members. Here’s a list of typical private lenders: 

• Family members
• Friends
• Business associates
• Colleagues or coworkers
• Real estate investors
• Angel investors
• Personal contacts from networking groups
• Members of investment clubs
• Wealthy acquaintances
• Mentors or advisors
• Alumni from educational institutions
• Club or organization members
• Personal attorney or accountant contacts

Again, this is not a regulated form of loan in any way, and so the list is not extensive. Anyone you know personally who is willing to lend you money on any arrangement counts as a private money lender. 

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Hard Money Loans Explained

Unlike traditional loans, where lenders rely heavily on income streams and credit scores to determine the amount of the loan, a hard money loan’s value is determined by the value of the hard asset being put up as collateral, such as a real estate property. 

Hard money lenders require a down payment, typically in the 15–35% range. They usually lend 100% of the renovation costs; however, they release in a series of draws as you complete the work.

While far more flexible than conventional mortgage lenders, most hard money lenders still use traditional lending guidelines and follow loan regulations. They expect a decent credit score and prefer lending to experienced real estate investors.

Also, hard money lenders can often move fast, closing your loan within 7–21 days, compared to traditional lenders that take 30–60 days to close a loan.

Types of Hard Money Loans

There are several types of hard money loans:

• Fix and Flip Loans
• Bridge Loans
• Construction Loans
• Land Loans
• Rental Loans
• Commercial Property Loans
• Refinance Loans
• Owner-Occupied Loans

Typically, real estate inventors go to hard money lenders for short-term loans to help them buy and renovate properties as fast as possible. They expect you to pay them back when you finish renovations and sell or refinance the property. That usually means a loan term of 6–18 months.

You can think of these lenders as purchase-rehab lenders or fix-and-flip lenders. But you don’t have to sell the property upon completing the renovations—you could refinance it to keep it as a rental property, following the BRRRR strategy.

Owner-occupied loans are the least used of all types, accounting for only  5-10% of all hard loans in the country. The Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) regulate owner-occupied mortgage loans far more aggressively than investment property loans.

How to Get A Hard Money Loan

Some hard money lenders operate locally, in a single city or area. Others lend nationwide or nearly nationwide. To compare loan terms among the larger hard lenders in the U.S., check out our comparison charts of investment property lenders.

Start reaching out to lenders to establish contact and collect price quotes. You want as many options in your “financing toolkit” as possible. 

If they don’t feel comfortable with the profit potential of your real estate project, they’ll turn you away. Remember that these asset-first lenders will pick apart your deal detail by detail. 

So, prepare a good pitch. Tell a good story about the deal. Demonstrate why you’ve scored a great bargain on the purchase price, why your renovations will create so much equity, and why the ARV will be much higher than your combined purchase and renovation costs.

Two lenders may turn down your loan, while a third may agree to work with you. They want to ensure you’re buying for a great price and have plenty of room to force equity through renovations.

If they believe the deal makes sense mathematically, they’ll lend you money, assuming you meet the other hard money loan requirements.

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How Do You Qualify For A Hard Money Loan?

There is no universal rule for qualifying for a hard money loan, as each lender imposes rules and requirements.

Hard money lenders might consider credit history, down payment, and real estate investing experience requirements. Some lenders offer preferential interest rates and fees to borrowers with more property investments or who have previously borrowed a certain number of loans.

For example, New Silver reduces the interest rate by 50 basis points (bps, or 0.5%) for borrowers who have taken out at least three loans with them in the last 24 months. They cut 75bps for investors who have borrowed at least six loans in the last two years and 100bps for borrowers with at least ten loans in that timeframe.

If interested, you can compare many hard money lenders’ terms on our investment property loans page.

As asset-first lenders, hard money lenders look at the property and your deal. They want to see you scoring a bargain with plenty of profit upside and room to force appreciation. 

That said, people with bad credit scores can get hard money loans. Some hard money lenders allow borrowers with scores as low as 575. However, most want to see high 600s or better credit scores. 

For example, Kiavi and RCN Capital require a minimum credit score of 660. New Silver allows credit scores as low as 650, and Lendency goes even lower, allowing a minimum score of 575.

Finally, some hard money lenders do require cash reserves at closing.

Down Payments for Hard Money Loans

No hard money lenders finance 100% of the purchase price of a property. You’ll need to cough up some dough for a down payment. How much? It depends—on your credit score, real estate experience, and the quality of the deal. 

Expect to put down 25–35% of the purchase price on the high side. If you have more experience and stronger credit, you might put down 15–20%, or even 10%, if you have a long history of borrowing from a specific lender. Note that hard money lenders use two numbers here: LTC and LTV. 

Loan-to-cost (LTC) is the percentage of the purchase price that they’ll lend you. Hard money lenders also use the loan-to-value ratio (LTV) to measure the loan as a percentage of the after-repair value (ARV). For instance, the lender might offer a lower 75% LTV or 85% LTC. 

Lastly, unlike conforming mortgage lenders, hard money lenders often allow you to borrow the down payment. Hard money lenders effectively shrug and say, “Get the rest of the money wherever you want; it just won’t come from us.” 

That means you can minimize your down payment by combining a hard money loan with other forms of financing, such as unsecured business credit through a service like Fund&Grow. 

Private Money vs Hard Money Loans: Which One Do You Choose?

Like almost everything else in real estate, the answer is it depends. 

Hard money loans are more appropriate for projects requiring quick funding, deals that need a strong LTV, completing construction projects, or if the borrower has less-than-perfect credit scores. 

Meanwhile, private money loans are better for less time-sensitive projects. Due to its more flexible terms and rates, it can be better for borrowers who need more time to repay their loans. Of course, these benefits heavily depend on the borrower’s relationship with the lender. 

In the end, pick what’s best for you and your circumstances. 

What have your experiences with hard money and private lending versus traditional bank loans? What types of loans have you had the most success with in your property purchases?