Should I use a Private Lender or Hard Money Lender?

There are some people out there that will delineate these two in completely different ways. I personally think they are extremely similar. Let me give you some descriptions.

What is a hard money lender? Does it sound scary? Check out that word in the beginning of the term, “hard”. Hard has such a negative connotation with it, doesn’t it? The “hard” in “hard money lender” doesn’t imply difficult, demanding or troublesome like it may sound—there is no leg breaking or anything shady going on here. The word “hard” refers to the fact that the lender will underwrite your loan with your “hard” asset as collateral, secured by a note and mortgage, typically for funding real estate transactions. Don’t have an 800 credit score? That’s okay. They don’t rely as heavily on your debt coverage ratio, FICO credit score or your ability to repay (but those factors do carry some weight). The consensus here is that hard money lenders do this as a business, may have a license, may charge higher rates, may have overhead they need to cover and most likely advertise their services.

What is a private lender? Opposite of a hard money lender, we have the private lender who may be any individual (or company) who lends out money. Other than that, they lend in a similar way that hard money lenders do. This could be a close friend or a wealthy person you meet that likes to lend out funds. They typically collateralize their loans unless it’s your uncle who will collateralize their trust in you. The consensus here is that private lenders don’t do this as a business, are probably not licensed, more lenient, charge lower rates and most likely do not advertise their services.

Private Money Lender? It’s all semantics to me. Based on the above private and hard money lender descriptions you can probably see how these may overlap from time to time and the terms can become blurred. I’ve seen “private lenders” advertise their lending criteria as well as personal friends thinking they have become hard money lenders because they lent money to a friend on one deal. I’ve also seen many private lenders charge a smidge under the usury rate and be just as strict as a hard money lending company. For this reason I avoid both hard money lender and/or private lender terms and strictly use private money lender, which encompasses them all for me. They can both be creative solutions to your financing needs.

The fact of the matter is that this is all private money from one or a pool of syndicated investors. It is not going through any conventional lending process. Hard money lenders may have added underwriting processes but any savvy private lender is going to do his or her due diligence on the loan they are going to trust you with.

What about Soft Money?I must bring this up because it’s amusing. Some lenders have started using the term “soft money” which I suppose, has a better connotation associated with it. Supposedly these soft loans are underwritten with the same hard money terms, however, they come with added benefits of longer terms, lower rates, quicker approval and access to loan funds. They may cite that they can do this because they are utilizing your credit as well. However, please don’t believe any of this. This is all lender marketing hype. I’ve seen many similar loans from private and hard money lenders that have low rates and long terms that have utilized credit and most especially underwrote the entire deal from beginning to end. Quality private moneylenders who want repeat business will award their loyal borrowers with a rate that matches the risk of the loan. A loan, to a lender, is basically a risk/reward scenario.

Remember, finding quality lenders to keep on your real estate growth team should be paramount. If you don’t already have a lender, please keep your eye out for lenders that pique your interest. You may not need funding right now but when you need it you may be scrambling to get funded. Keep notes of all lending advertisements that you think may be of interest to you and your business in the future as, to quote one of my favorite quotes, by Louis Pasteur, “Luck favors the prepared mind”.

Here for you in success.

Lenny Longo