The topics of hard money and private money can be pretty convoluted. It’s even difficult to nail down the definitions.
Throughout the BiggerPockets forums, several posts address hard versus private money. Countless perspectives have been presented.
The reality is there are no hard and fast rules about how the terminology is used. There are popular views that have been proclaimed loudly and repeatedly, making them appear to be the actual answer; however, nothing’s been officially agreed upon.
The fact of the matter is the term “hard money” is simply naming a convention.
I’ve been a hard money lender for 12 years, and I’ve spoken to many borrowers and lenders. I’ve compiled a few guidelines to help improve your understanding of hard money—at least as it exists in my region.
Much about real estate is local, and since hard money is essentially a loan on a hard asset, it follows that hard money practices vary by region, as well. (It’s something to keep in mind at least.)
What Is Hard Money?
A hard money loan is a loan collateralized by a hard asset (often real estate). Therefore, a hard money lender is a lender who uses the value of the underlying real estate to determine the loan amount and rate.
There are very few true hard money lenders left. Most of them ask for FICO scores, tax returns, or other indicators traditionally used by conventional lenders.
What Is Private Money?
Private money is what it sounds like. It’s money lent by a private person or organization. As such, terms vary widely.
A private lender can use whatever criteria he or she is comfortable with when “qualifying” the person or entity to which they lend. It can be as basic as, “I’ve known you since you were in diapers, so I trust you.”
What Do Hard Money and Private Money Share in Common?
Neither hard money nor private lenders are restricted by banking regulations. They are non-institutional.
But both institutional and non-institutional lenders must comply with all lending laws, so there is no free pass for hard money or private lenders.
Extreme Examples of Private Money vs. Hard Money
Let’s consider two clear cut cases.
Case #1: Your grandma believes in you and wants to lend you money for a down payment. She would never lend to anyone else and won’t charge you much. She’s clearly a private lender.
Case #2: A company or person advertising as a hard money lender is pretty clearly a hard money lender. There shouldn’t be any confusion.
Tricky Examples of Private Money vs. Hard Money
Here are two not-so-clear-cut examples.
Case #1: Your dentist has known you for years and has several real estate investments himself. He has lent money to one other client, also a real estate investor, and is willing to fund your deal.
He doesn’t want you advertising his services to others though. He’s a private lender—not available to the general public.
Case #2: Take that same dentist, but now his real estate attorney brokers lending deals to him. He wants more clients and wants you to spread the word.
He would be considered a hard money lender since his pool of borrowers could be anyone who meets his criteria, not just friends and family.
Other Determining Factors: Is It Hard Money or Private Money?
Rates and Terms
If rates and terms are similar to other hard money lenders, consider them a hard money lender.
If they advertise, or stand up at a real estate group and announce they lend, consider them a hard money lender.
There is no hard and fast definition of a private lender versus a hard money lender. In fact, any non-institutional lender can call themselves a “private lender”—that is if they choose to be defined as “non-institutional.”
But in today’s common usage, a hard money lender advertises his services, has a process for qualifying loan applicants, and is available to any borrower meeting the established criteria.
A private lender is someone you know, who doesn’t lend to the general public and may charge less than the local going rate.
Don’t be misled by hard money lenders calling themselves private lenders just to sound cheaper or less scary. I can call myself President of the United States, but that doesn’t make it so.
Evaluate each lender based on your needs, their reputation, and their ability to deliver what they say.
Can I provide any further clarification about either type of loan? What’s been your experience with hard money? Private money?
Let me know in the comment section!