Private Lender vs Hard Money Lender

25 Replies

Is there a difference between the two?

If the loan terms were the same, would you be more likely to work with a private lender or a hard money lender?

Hard money lenders use private money, so to my mind they are the same. I'm just wondering how investors perceive the two.

A private money lender is someone you now personally who's willing to lend to you. If its advertised in any way its not private. Hard money lenders do indeed often take in money from private individuals then lend it out.

Of course you know this since you're a hard money lender.

I know what the difference is but that’s irrelevant. What matters is what borrowers think. Assume two individuals had their own money to lend, on exactly the same terms, one called himself (herself?) a hard money lender and the other called himself a private lender, which would borrowers be more likely to want to work with. I’m thinking borrowers would be more comfortable working with the private lender.

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David -

I give the benefit of the doubt with your last post in response to Jon and assume that you don't really mean that the difference is irrelevant. Comes across as if you are saying as long as you can convince the borrower that you are not a perceived bad lender, then they must perceive you as being a good one. If the terms are the same then most investors do not care. If you are asking because it is better to market as one or the other, then, I would say that Hard Money lender has connotations that may make some investors nervous where private lender does not.

@Jon Holdman or anyone else - any legalities that you know of to what a lender can call themselves?

I've always separated it by whether they have a mortgage broker license or not. Private money sounds better because the terms are typically more favorable: less points, less papework, less hassle, etc.

If all terms were equal, the words "private money" sound better to me.

So what you really want to know is how a private money lender and a hard money lender is viewed by the public?!?!

Neither of these terms has any legal merit, "Hard Money Lender" is a term used by RE types and interchangably with a "Private Money Lender" Jon has mention the difference and IMO it goes further, that a person or member in a company may loan funds within the company entity and the would be a private source of funds or lender. Another that comes closer to any legal definition is within SEC Regs and the Safe Act when talking about family members who loan money for a mortgage or business venture as being a "private party".

I have never use the term Hard Money Lender as to me it has a negative connotation, the interest rates charged, terms and some shady types, IMO, seem to be referred to as the HM lender.

The fact that I actually fund with my money or "invested" funds or another's money is irrelevant to lending. If you are making mortgage loans you are a mortgage lender, especially if you are in the business of doing so! In court, you will be defined as a mortgage lender or a broker and not either of the terms you mentioned.

So I'd suggest you use "mortgage lender" or "mortgage broker" which is better understood by the public, in the financial arena and legal circles. Hard money lender is simply accepted slang in the industry.

Chirs: I'm saying that i know the difference is irrelevant to my question. I'm not sure what you are saying in the first part of your paragraph, I'm certainly not talking about deception, but your comment "If you are asking because it is better to market as one or the other, then, I would say that Hard Money lender has connotations that may make some investors nervous where private lender does not." answers my question perfectly.

If an individual has money to lend and is lending it to people he knows personally, its private money. The only way anyone finds out about the money is to personally meet the lender. The loan is being made based on a personal relationship between the borrower and the lender. If this lender calls themself a "hard money lender", then that really doesn't change anything.

As Bill points out, there's no legal meaning to any of these terms.

If that same person creates a self-funded lending business that he advertises and promotes, he's a hard money lender. If a company or broker solicits money from individuals and lends it out, they hard money lenders. In either case, calling themselves a private money lender would be, IMHO, deceptive. Yes, I do think "private money"has a somewhat more respectable air than "hard money". But when you're advertising and promoting your business it could hardly be called "private", could it. So, calling the business "private money" would, again IMHO, be attempting to wrap an air of credibility around what's viewed as a somewhat seedy business.

Connotations aside, I’ve had this exact conversation with several of our borrowers and they really do use each type of lender differently.

One advantage of dealing with a small lender such as your dentist, or a mom and pop shop that lends their own money, is that they will tend to be a more lenient if you have a problem. The larger lenders, who are perhaps under pressure have to make a minimum ROI for their investors, might not be as easy to deal with; expecting you to jump thru smaller hoops and demanding additional pounds of flesh.

On the other hand, the larger lenders have an infrastructure available to support and advise you. Due to a larger number of loans and their experience, they often know of issues with certain areas, certain agents, escrow, title companies, as well as building departments, and appraisers. They’re also better at picking deals apart and can be a resource if your purchase or end sale is going south. The advice a larger lender provides on why they won’t loan on a deal is something you should take to heart and is advice you won’t receive from your dentist. If you’re starting out, or investing in unfamiliar areas, or perhaps doing riskier deals, a larger lender might be in your interest. Skilled borrowers know this.

Also, for what it’s worth, if you look at the membership list for the American Association of Private Lenders, you’ll see it’s comprised, in part, of many nationally known firms that most would think of as “Hard Money Lenders.” At this point, everyone seems to call themselves what they want and the trend is toward the soft and squishier "Private Lender." A rose by any other name….


Jon: I don’t see the deception in calling a hard money lender a private lender, private lender would actually be more accurate thus less deceptive, in my view, because it IS private money. I know private lenders that do everything legally, they market privately etc, then do the loan through a broker, the broker gets a relatively small fee, and their terms are the same or even harder that the traditional hard money lender. The terms are morphing together, why not use the one with the best marketing appeal.

I'd go with the HML.

Private Money is lent based on my personal reputation. If something goes bad, that takes a bit hit.

Hard Money is lent based on the deal. If the deal doesn't work out, we were all wrong in our analysis. My ability to analyze deals takes the hit, my professional reputation... not my personal reputation.

Originally posted by David C.:
Jon: I don’t see the deception in calling a hard money lender a private lender, private lender would actually be more accurate thus less deceptive, in my view, because it IS private money. I know private lenders that do everything legally, they market privately etc, then do the loan through a broker, the broker gets a relatively small fee, and their terms are the same or even harder that the traditional hard money lender. The terms are morphing together, why not use the one with the best marketing appeal.

The terms may be getting morphed by hard money lenders who what to sound like something they're not. By this definition a bank could claim to be a "private money lender" because the money they're lending out comes from private individuals who make loans. Most people would consider the bank that claim to be disingenuous if not outright deceptive. Sorry, I don't see a company that makes hard money loans by taking in funds from private individual any different.

But again, as Bill points out, these terms aren't trademarked and their usage isn't regulated by the SEC or any banking organization. So, you can call yourself whatever you want. I know a lender here in town who refers to her loans as "squishy money". When asked, I will continue to state that "private money" is someone you know personally who's lending you their own money. And that any company that's advertising they have money available for loan is a hard money lender, regardless of what they call themselves.

David, depending on the circumstances, it could make a huge difference in my opinion, I would take the Private Lender/Individual most of the times; time and circumstances changes people's minds, you could re-negotiate terms, move the note to another property, etc. Hard Money lenders will be way more strict on these types of creative transactions...

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Obviously the main thing that borrowers are going to care about is the attractiveness of the respective terms. It appears you're asking then, ceteris paribus, which of the two gives you more of the warm fuzzies?

Well... neither. Same with conventional or government insured lenders. That isn't the point... the point is to be able to perform to the contract the way it is agreed. After all, contracts are there to remind people of what they've already agreed to, not to force them into doing things they didn't want to (apart from the ones Luca Brasi makes you sign, of course).

So what you're really asking, @Account Closed , is whether or not someone will feel comfortable doing business with YOU, regardless of what you call yourself. I would say that the typical borrower might initially be more leery of an HML than a Private Money Lender, but having a well established operation and sterling reputation (or terrible business practices and a poor reputation) will swing that pendulum either way, and with far more volume than the title of its operator.

The two are relationship driven, they also complement each other very well. A HML can fund your deal and a private party individual could fund your rehab costs.

You will be way better off building rapport and establishing both relationships, they will serve you well.

There is another aspect to the private vs hard money debate.

I believe that "private money" refers to non-institituional funds in general. Institutional would include banks, mortgage companies that sell on the secondary market, insurance companies, etc.

Hard money, from the origin of the term, refers to a loan secured by a hard asset. Before the current mortgage system was in place, all mortgage loans were based on the hard asset, and not on soft criteria, such as credit and dti.

So in my opinion, most hard money falls under the umbrella term private money, if private money means non-institutional money.

Fast forward to now, and the terms have become intermingled, and sometimes have negative connotations. I believe these differences are somewhat moot, and are currently used for marketing purposes, as pointed out above. I have also seen companies call themselves hard money or private, but have very strict fico and dti requirements, and be selling their loans on the secondary market. These companies are evidently attempting to market themselves as rapid response.

Certainly the term hard money has acquired a less than stellar reputation. And there are certainly plenty of companies and people out there who consistently provide fuel to the fire. But in reality, it simply means a loan secured by real estate and not based on credit or ability to pay.

We have given our own meaning to the terms private and hard money, but in the end, the reputation of the lender and their ability to deliver what the borrower needs are more important than what you call them.

Knowing what I now know, I would probably choose another web domain, but my borrowers depend on my reputation and ability to deliver, not on the name of my website.

Clear as mud! ha! As a novice to RE investing, this is a very important concept for me to understand, especially as I await for my first of many offers on the table to be accepted - at which point I will be scrambling to fund. The way I understand it, Private Lender normally refers to the non-regulated lenders, therefore limiting their fees (%). Hard money lenders are "middle-men" who themselves borrow private money, add a few % points and additional fees and loan out. I personally only care how much it's going to cost me.

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I agree with Bill on this as far as definition, absolutely. I'm in another state now helping a new investor get started. As I've looked into the local hard money lenders, since mine do not lend in this state. If it's called hard money the the risk is centered on the asset in question not your other assets, DTI, reserves and so on. They should want to know if you are legitimate, not going to up and run leave them hanging to finish your part of the deal.

The deal we are shopping around now $230,000 ARV conservative by $10,000 to $15,000 $130,000 Full purchase price $45,000 to $50,000 in repairs. With a seller carry back $20,000 At 70% of ARV that's $161,000. The hard money lenders (some) are asking for 10% down 4 Points and $750.00 in fees. With full recourse. That, by definition is not hard money. This is an attractive deal for a true hard money lender, at least it would be in my state. If I were dealing with them I'd make a call and they would check the facts and we could be funded the same day in many cases. Are they stricter than 7 years ago? Yes, But they certainly are not looking for full recourse,on these loans. There's a red flag.

While I realize all lenders are much stricter on lending rules and would want to see you with skin in the deal. Very understandable. But it sounds like they're hedging their bets to take advantage of those less experienced. Hard money is riskier by it's very nature, that's why they want fees, high interest rates and LTV of 70% of ARV or below.

Just wanted to point out that Jeff makes a very valid point as to the perception of where the money is coming from. "Private" has nothing to do with source of funds so much, as if it's money I earned selling widgets and it belongs to me personally. It's much more to the point that you are dealing with an individual who is not in the business of lending, if you're in the business of lending seeking borrowers, it's no longer a private transaction as defined by SEC or under exemptions of financing or banking laws.

Again, the terms are not legally defined but the source of money, the relationship of the parties and past dealings of the parties are defined establishing what is a privately funded transaction and what is not. Logically then if it is a privately funded loan that lender is a private lender, the other is not.

Jeff's point as to a borrower's perception is more than valid as the public sees dealing with an individual a lot less intimidating than anyone in the business of lending. They realize that Harry's Pawn shop will take their collateral if the miss the payment. They often believe that granny will let them slide a bit more and deal with them as she just wants her interest and principal (all lenders do) but there is more of a threating feeling when they are dealing with a professional lender. There is the public perception of a loan shark, a guy with money who charges high rates and will snag your collateral at the fist opportunity and cheat you out of getting it back. That's reality.

Which I'd say why that association of private lenders chose the term, to soften public perception.

Hard money lender really isn't a proper term, some state law may use the term to describe who might be regulated or define a lending practice but it's not in federal law that I know of, private lender is.

The issue of an individual who wants to be in the business using "Private Lender" is obvious, they don't want any negative connation, if any, related to Hard Money Lender and they don't want to just say Mortgage Lender as that can bring regulators snooping at the door since they are regulated. But there are unregulated mortgage lenders. Calling yourself a "Mortgage Broker" is entirely different and that's not what a individual lender loaning their money is doing and since they are regulated, don't use that name or term.

I realize the difference in perceptions as I made private loans, loans funded by private individuals who had never made a loan in their life, investors who funded loans but had no real oversight in the loan made, loans funded by individuals who were in the business of loaning their money as well as institutional money. Each of these sources of funds invoked different opinions by borrowers to some degree, you can easily read the concern or lack of it as you explain how their loan will be funded, by who and overseen. No where is it more evident than when dealing with someone suffering in some contract for deed deal needing to be refinanced or where some investor, in the business, was trying to lower the hammer on them. Jumping from the pot into the fire so to speak. However, I was in a brokerage situation, I was always in charge of servicing and devising the deal and I could overcome any of these concerns related to the source of funds or perceptions a borrower may have had.

I know too that David or Jon, or Jake or Ann or anyone else here won't be loaning money as a brokerage or individually in consumer transactions. Your loans will be on a commercial basis with investor/operators in RE, so the perception should take on a different flavor than by the general public. Even so, I'd say the more proper term might be "commercial lender". It even sounds more professional, IMO or you could say a "private commercial lender" to differentiate between sounding like a bank and an individual.

Because there are strategies in RE investing that are anchored in truly privately financed transactions, seeking money from granny, or your dentist or taking on a partner I'd think that one who was in the business of lending is not only not a private lender but is, to a degree deceiving borrowers at least initially who may be seeking a private lending/partner. They should know the difference by seeing an ad offering to make a loan, but in the case of the new investor types I can understand that oversight. But it isn't painting the truest picture of lending soliciting borrowers saying you're a private lender.

If you ever end up in court on some deal and you stand there and refer to yourself as a "private lender" I'd think any judge or attorney familiar with financing or SEC requirements, even on a basic level, will know you aren't a "private lender" not being related to the borrower in some fashion and will begin to form an opinion, not only to your true position but to your legal understandings, your professionalism, how you may have approached your borrower, how you sold your deal, that perception runs much deeper. You can't just invent what you do and justify it by having had written a personal check, that is totally irrelevant. In fact, in instances where there were legal issues I don't ever recall the source of a lender's money being mentioned outside of investor/brokerage loans. The funds are assumed to be funds of the lender's and his source of funds has no bearing on the terms of the loan, what type of loan it is or effecting any manner of default. Just saying, that's not a basis nor even an argument to make. In court, just say "I am/was the lender" and leave it at that. :)

For those that believe loans should be non-recourse: From a lender's perspective, what you are saying is that for example if the property burns to the ground and the insurance doesn't cover it, either because borrower didn't pay the premiums or got a landlord's policy when you should have gotten a builders risk policy, the lender should take the hit. But, on the other hand, if the borrower makes a huge profit the borrower keeps it all for himself. Sounds more like a marriage than a commercial transaction.


I've borrowed over 10 Million dollars from private lenders over the past 14 years of investing. They are like night and day. A private lender does not need to initial know you either. My first private lender was a guy who was mentioned in a book I was reading on real estate investing. I looked him up online because he had a unique name and called his house. I simply asked his wife if he was a private lender she said yes and she would have him call me when he got home. We met in his office a few days later and I met him and his partner. I have been borrowing money from them for over 14 years now (No resume, No checking of credit, No bank statement check, No background check, No Tax return check, No financial statement) JUST SHOW US THE DEAL!!!!! Always at 100% of the purchase and a 100% of construction. These guys where real estate investors them selves, but now ran construction companies, print shops, etc. They also had family funds in the mix as well. Though the total cost and loan is always below 75% of the ARV.