This page is the very beginning of PMLG’s Lending Guide. From here, you’ll learn everything from risks associated with private money lending to evaluating contracts and how to negotiate an advantageous deal. Here we go!
What is Private Money Lending?
Private money lending goes by many names, most commonly private money or hard money. These terms broadly describe any individual or company that is not a bank and lends money based on non-traditional qualifying guidelines. Based on this increased risk, their terms can be much higher than traditional financing. They fund deals that traditional banks won’t touch, with the money typically sourced from private investors. You can find out more about the specific tasks a private lender does here.
While you’ll find debates all over the internet about whether or not private and hard money are the same, there is no legal difference between the two terms. In point of fact, they are not legal terms at all, simply further differentiation of mortgage brokers, loan brokers and loan originators. Which term a lender calls themselves largely comes down to personal preference and perceived public perception. Hard money is the “original” vocabulary, somewhat abandoned due to the Wild West days when the financing industry as a whole was less regulated. Private lending is a newer term that many feel better describes the actual practice as it’s done today.
For this reason, Private Money Lending Guide uses “private money” and “hard money” interchangeably; you may see us refer to them both even within the same article.
Where does the term “hard money” or “hard cash” come from?
The term hard money is used in conjunction with a loan which is “hard to get” from a traditional lending source, like a bank. The term also comes from the asset pledged as collateral in return for the loan. When a borrower pledges the asset as collateral, the asset goes “hard” as collateral against the loan.
The terms private money and private money lender are working their way into the vernacular and are more descriptive of the professional lending practices in place today. Private parties fund loans individually or as a group, for transactions which fall outside the scope of traditional bank loans.
Do private money loans only cater to desperate or risky borrowers?
Not at all. In most cases, private money loans are made to entrepreneurs who just don’t otherwise qualify for a traditional bank loan. Many borrowers prefer private money lenders to banks because they can originate loans faster, require less documentation, and are more savvy and open to alternative sources of collateral than banks.
As the name implies, private money lending is the business of lending capital for investments secured through various vehicles, such as real estate. There are two ways to obtain capital: through private investors (also called personal investors) or through private lenders. Private investors could be individuals with direct capital or groups of individuals who pool their money together to fund loans. Private lenders are companies that manage their own or private investors’ capital and issue loans, much like a bank.
When is the best time to use private or hard money?
There are myriad reasons to look at using hard money. You’ll most commonly need to look for private money or hard money lenders if you:
- Have bad, thin or no credit.
- Need to move quickly to close your real estate investment (within a couple weeks or less).
- Will need to make major repairs on the property as a rehab or fix-and-flip.
- Require a loan for only a short period of time, like a bridge loan.
- Want to leverage your available cash for multiple loans/deals, instead of it going toward just one down payment.
- Are looking for a higher loan-to-value (LVT) than you can get from traditional banking.
- Need the money for other projects that banks have a hard time financing. This may include land, construction, and properties located in areas with high default rates.
- Have a high debt-to-income ratio.
- Have reached the maximum number of real estate-based loans a bank is able or allowed to finance.
The list goes on – pretty much any reason a bank might turn you down, you’ll find a private money or hard money lender who is willing to take the deal on.