The Difference Between Hard Money Loans and Private Money Loans
There is great confusion amongst real estate investors and loan applicants between the difference of a hard money loan and a private money loan.
A hard money loan is a type of private loan that is not regulated by the government or any public organization.
This means the lender has the ability to approve loans even if other lenders denied you before, or can offer alternative programs and terms that would otherwise not be available with traditional lending sources.
Historically, when the real estate community refers to a private loan, they are usually talking about a hard money loan.
Hard money loans and private loans use the applicant’s equity in determining qualification for the loan. The applicant must have at least 30 percent equity to be approved for any private loan.
The properties equity, which acts as collateral, provides the lender assurances that in the event the borrower can no longer afford the mortgage, they can foreclose on the property without losing money.
What Type of Loan Category Do Both Fit Under?
Hard money loans and private loans are asset based loans. This means the lenders primary concern when deciding to approve a borrower is the amount of equity available on the property.
Unlike traditional loans where eligibility is determined by income, credit, and other financial factors, private hard money loans’ eligibility is determined almost exclusively by the loan to value of the applicant’s current property.
The maximum LTV that a lender may consider is usually 70 percent or lower. The higher the borrowers LTV, the lower the chance they will be qualified. Higher LTV’s also may require borrowers to pay a higher interest rate because of the higher risk of default for the borrower. Lenders do this to protect their loan investment.
Are There Really Any Differences?
In the context of real estate conversation, hard money and private lending is synonymous. The two terms are used almost interchangeably amongst real estate investors.
Because both sources of lending do not derive from a public source, they are both considered private money.
Although most real estate professionals view the two terms as synonymous with each other, some real estate professionals may refer to a private loan as a loan deriving from a friend, business partner or family member.
What is the Difference between the Two Loans?
Traditionally speaking, both loans are the same. The major difference between both loans, if any at all, is the fact that a hard money loan funding source is from a lending agency rather than loans being made by individuals for private loans.
The major advantage of using a hard money lender, rather than a private lender is the fact that a hard money source has more capital to lend, thereby greatly increasing the odds of being able to retain a loan. In addition, because private lenders are not lenders by trade, they may not have as many loan options and programs available.
Private loan programs tend to be more static, whereas a hard money lender has more creative financing programs available because of their larger funding source. Because hard money lenders primary role is to fund loans, the chance of being approved for a loan is much greater with a hard money lender.
Also, the chance of finding a private individual who is willing to fund a loan is much lower than getting the loan from a hard money source.
Difference in Interest Rate
Private and hard money lenders offer similar interest rates, both usually above the standard market interest rate.
The reason rates for hard money and private money are higher than most loans is because the risk of providing the loan is much greater.
Typically, both lending sources do not have thorough approval processes that rely on income, credit, assets, tax returns, etc., and therefore because approval decisions are made based on equity, they have to charge a higher interest rate to compensate for the higher risk.
Although interest rates for both programs are similar, in some scenarios private money may be cheaper. This does not mean however that private loans are better than hard money.
In fact, sometimes the opposite holds true because hard money lenders have more programs and higher eligibility than private loans.