You’re about to make a large real estate investment but before deciding which lender to work with, you’re asking yourself one important question: What is the difference between a hard money lender and a private money lender? Although there are distinctions between the two, they are parallel in some aspects of their operations (which we will cover shortly). It’s important to understand the differences so you can find out which option best suits your qualifications and the deals you’re trying to finance.
What is a Hard Money Lender?
Hard money lenders are private companies (or investors) offering asset-based loans that borrowers secure with real property. These lenders have the ability to distribute capital more quickly than a bank, but their interest rates are typically higher than those offered by institutional lenders because of the higher risk and shorter duration of the loan.
What is a Private Money Lender?
Private money lenders are essentially the same as hard money lenders, but with one very important distinction — private money lenders control their own capital and do not rely on a third party as part of the approval process.
Private money lenders and hard money lenders are both suitable for borrowers who cannot wait the typical 30-45 days that a mortgage loan takes to be approved, as they both move quicker than banks since they are not regulated by a banking group. Both focus on the asset and collateral when making decisions and are more flexible than traditional banks. They are able to overlook blemishes on your credit or financial profile, and typically only lend on investment properties (not primary residences).
Hard money lenders tend to evaluate loans based on the collateral and value of the asset in the event the borrower has to exit the loan. Whereas, with private money lenders, the primary objective is devising a loan that is a good fit for both the borrower and lender, in addition to securing the asset value. Because they control their own capital, private lenders tend to base their overall success on the success of their borrowers. Even though a private lender may review the borrower’s credit history, financials, track record, and real estate owned “schedule” in order to qualify them for a loan, that is only part of the equation. Often, and more importantly, are the borrower’s real estate investing experience, as well as the potential relationship the lender is able to establish with the borrower.
The intensive involvement and flexibility of a private lender allows them to react immediately to any unforeseen circumstances. As mentioned above, a private money lender wants the deal to work for both themselves and the borrower, so they are generally more willing to reconsider the terms if necessary. The collateral simply serves as a “Plan B” if the borrower is ultimately unable to repay the loan.
“It’s always important to weigh the pros and cons of all lending options,” states Nate Trunfio, President of Lending at DLP Direct Lending Partners. “But investors can certainly benefit from their ability of private money lenders to take more risks, be more flexible, and creatively structure deals that work for all sides.”
To discuss your funding needs with a private money lender, call us at 610.590.4840 or start a new loan application and one of our team members will contact you to answer your questions.