Hard Money Lenders, Private Lenders, Terminology. Part 2.

    Part 1 of this article discussed the term Hard Money and some characteristics of Hard Money Loans. This article will discuss the terms Hard Money Lenders and Private Money Lenders.

Hard Money Lenders. These are companies or individuals who are in the business of lending money and they must lend money in order to stay in business. They originate hard money loans. They must be licensed through the National Mortgage Licensing System (NMLS) and the State Regulatory agencies where they lend. They will usually have formal application procedures and may charge application fees to consider a loan and other fees (origination fees, underwriting fees, etc.) if they fund a loan. They may lend their own funds or they may have investors who provide funds for them to lend. They may service their loans themselves or sell their loans in order to recover their funds and earn a profit.

     Hard money lenders will often have websites that will outline the basic parameters under which they will lend, rate, term (length of loan), loan to value (LTV) ratio, amount, etc. The types of loans hard money lenders will consider, the terms of the loans and the documentation needed to qualify for the loans will vary considerably between different hard money lenders. They are likely to be willing to spend a little time discussing their parameters ahead of the time a borrower needs a loan and if a borrower brings a deal that meets their parameters they are likely to be able to fund. They may not be able to quote a firm interest rate or terms because the final details will be largely dependent upon the details of the property which secures the loan.

Private Money Lenders. Any organization (i.e. a bank, credit union, etc.) which is not a government entity is a private lender. Hard money lenders are private lenders. However, when private money is discussed as an alternative, non-conventional source of funds the term private money lender usually refers to an individual.

     These are individuals who are not in the business of lending money. They will not usually advertise. They may be open to lending money for real estate projects because of previous experience with real estate, lending, or simply because they are attracted to the possibilities of earning higher yields than are available with other investments. If they lend they will be using their own funds. Potential private money lenders are everywhere. They may be relatives, co-workers, doctors, factory workers, businesspeople. Anyone with a retirement account may be a potential private money lender.

     Private lenders won’t have websites and may not even know what terms they would accept. Many inexperienced lenders may not have thought much about what is possible. Many are relying on you, the borrower, to make a proposal and to protect them. You may find someone who has funds earning 1% in a bank (can a 1% return really be classified as earning?) who will be thrilled if you offer them 7%. They may be nervous about accepting an offer of 10% interest as it may seem risky. An offer of 18% interest may scare them into not accepting your deal—they may think that interest rate is so high that participating in the deal would be unwise.

     Beware. There are hard money lenders on this site and other social media sites who masquerade as private money lenders. Some of them may be licensed, some of them aren’t but should be. Some of this type of lender will misuse the term soft money to imply that their rates and terms are better than the hard money guys. There are scammers who may offer loans that are easy to qualify for if you pay an application fee up front to get the process started. After they receive the fee they may offer many explanations why paperwork has not been processed or why the applicant does not qualify for the loan. Though it is reasonable to pay some fees up front (an appraisal fee for example) be skeptical if a large fee is required to consider your proposal. Seek references and learn who you are dealing with.

Experienced Private Lenders.This is a term I sometimes use to describe a hybrid type of lender you may run into here on BP or at REIA meetings. These are people lending their own funds who will usually service their loans themselves. They know lending or real estate and, sometimes, both. They have loaned money before, perhaps many times before. An 18% interest rate won’t scare them—they may demand it and get it regularly. They probably won’t have websites and though they may hint that they lend (sometimes they give large hints) they will not do any serious advertising. They will have target interest rates and terms that they are comfortable extending and will probably be willing to discuss those in general, but again, they will not be able to give you specific parameters until you have a specific deal locked up. They are not likely to be excited about single digit interest rates but they may be quite flexible on length of the loan, whether payments are necessary during the rehab, the LTV (loan to value ratio) or other parameters. These are still not professionals—they are not in the business of originating loans and though they may wish to lend, they do not have to. The underlying property will be very important to them but so will the way you approach them.

     Experienced borrowers/investors often find it easier to qualify for loans from hard money lenders or experienced private money lenders as opposed to traditional lending instituions. Using the terminology incorrectly gives the impression that you are inexperienced. Inexperienced borrowers/investors who are approved for loans will often pay higher interest rates and will be offered less generous terms than those who are experienced.

                                           Please subscribe to this blog with the button below.