What is the Difference Between a Hard Money and Private Money Lender?

The mortgage industry describes a hard money lender and a private money lender synonymously.  But, they are not the same.

The only similarity that they share in common is that both are asset based investors lending on the equity in the property and not the personal and financial credentials of the borrower.

One other point that I must mention is that this information is specifically catered to residential hard money loans and not commercial.  My website caters to financially distressed homeowners seeking assistance to mitigate their mortgage.  Therefore, I am offering another solution that homeowners may want to consider.

I will begin with identifying specific characteristics of a hard money lender and then compare them to a private money investor.

  1. Most hard money lenders seeking to lend money on a residential owner-occupied property are limited and few.    Most loan brokers will not share that information
  2. Hard money lenders are geared toward flipping properties on a short term basis, therefore 1-6 months is the maximum that they will lend on hard money.  However, there are a few hard money lenders that will extend the loan term  1-2 years.
  3. Hard money lenders will lend on a 60-70% loan to value (LTV).  This means that the homeowner must have at least 30-40% equity in the property.  Because property values have sky-rocketed in the past year, many homeowners will be fortunate enough to take advantage of this opportunity.
  4. Credit is not an issue unless the borrower has demonstrated a total lack of responsibility to their obligations.
  5. Income documentation will be verified and must be sufficient to cover the monthly mortgage payment, taxes and insurance.  In addition, there must be enough funds to cover the costs of the hard money loan.
  6.  Interest rates on hard money loans can be a spread of 8-15% interest only.
  7. Most hard money lenders charge points between 2-5% of the loan amount.
  8. Hard money lenders have a speedy process and a loan can be obtained within 1-3 weeks

Now, let’s talk about private money investors, which is the preference to hard money lenders and here’s why:

  1. Private money investors on a residential owner-occupied loan are considered buy and hold investors.  This means that they are not interested in flipping the property to turn a quick profit.  Their profits are generated by the interest rate charged to the homeowner and the fees and points.
  2. Private money investors will lend on an average 1-5 years depending on the negotiated terms between the homeowner and investor.
  3. However, private investors do not differ to much from a hard money lender with regard to LTV.  Most investors are looking for 65-80% maximum LTV.  An 80% LTV might be considered if less risk is involved due to the homeowner having above average credit scores, job stability, and sufficient income documentation.
  4. Although credit is not a critical issue, it will be verified and the investor is looking for homeowners that have demonstrated a willingness to pay their debts on time.
  5. Income documentation will be verified and there must be sufficient income to cover the total mortgage payment including taxes and insurance.
  6. Private money investors interest rates are not as harsh as hard money, their rates can vary from 7-10% interest only  considering the financial health of the homeowner.
  7. Private money investors points and fees vary from 1-3% of the loan amount
  8. Like hard money lenders, private money investors have a speedy process too, usually 1-4 weeks.

I’m sure that anyone that has read this post is now wondering where and how do they find private money investors.  It’s not easy and there are not tons of private money investors out there.

Most private money investors are your family, friends, and small real estate investors.  As you can see, you probably already know these people.

If you don’t have an arsenal of wealthy friends and family, then it will be most difficult to find private money lenders because they do not advertise heavily to the public unlike hard money lenders.

To that end, hard money is easier to find, but if you take a little time and effort to find private money lenders, you will find that they are available……but you must inquire.   I will be working on putting a directory of available hard money and private money investors.

Please check back from time to time and review the list.  I hope these tips have been helpful to you and the best of luck to you in your quest.

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