Some consider private money and hard money lenders essentially the same thing. But there are a few fundamental differences you of which you should be aware. It all comes down to the criteria these lenders use to evaluate borrowers, and these considerations can impact the type of deal you can secure.
The main difference between these two types of lenders is how they evaluate individual borrowers. Private lenders might consider all three C’s of lending (credit, capacity, and collateral). Hard money providers generally only consider the value of the collateral on offer.
Therefore, private lenders may put scrutiny on aspects of your financial history such as your credit score. A private lender may also want to get a sense of your capacity or your ability to repay your loan. They might look into your financial history to ensure your income is sufficient to carry your current debts, usually this measurement is expressed as a debt to income ratio (DTI). If your credit score or DTI doesn’t meet the private lender’s criteria, you may not qualify.
In contrast, hard money providers mainly look at the value of the collateral on offer, i.e., the value or potential value of the property you aim to finance. However because collateral is the primary consideration in the case of hard money there are some misconceptions when it comes to this type of lending.
Because hard money providers mainly look at the collateral offered by the borrower, they assume a higher risk. Because of this assumed risk hard money is often more expensive than private money.
However, some assume that hard money providers are less flexible than their private counterparts. Because this type of lender only looks at collateral, they might have less confidence in a borrowers ability to repay. Therefore, if a borrower meets turbulent fiscal headwinds, many assume it’s in a hard money providers best interest to foreclose on the property and resell it at a profit.
But this is a flawed assumption; because any reputable lender wants their borrower to succeed.
Foreclosure is a hassle, and no one wants to deal with it. So don’t assume your hard money provider won’t work with you if you run into financial difficulties.
Going the private money route can result in a better deal. Because most private money providers look into your credit and your capacity to repay, and therefore they have more confidence in you as a borrower.
This confidence on the part of the private lender could give you the leverage to negotiate a better deal.
While private money may potentially be cheaper, it may also be less convenient. You may not qualify according to the standards of an individual lender. In addition, underwriting your loan could take a long time, and this application process could cause you to miss out on your investment opportunity.
But there are no hard and fast rules in the case of either private money or hard money, as every individual lender is different.
Just know that the primary difference is that private lenders may consider( may being the operative word here), all three C’s of lending before approving an application, while hard money providers only consider the collateral on offer.
Private lenders might be able to offer cheaper loans, but the application process might also be less convenient when compared with their hard money counterparts. It is a catch 22. Private money might be less expensive but also less convenient. Hard money might be more convenient but it also might be more expensive.
However, don’t make assumptions, every private or hard money lender is different. Ask any lender you approach about how they evaluate individual borrowers to see what type of deal you might be able to negotiate.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.© 2016 Level 4 Funding LLC. All Rights Reserved.