Hard Money vs. Private Money: Are They Really Different?
Every once in a while we come across an article that makes us stop and think, "Wait, is that really how people are defining hard money now?"
This happened recently when we read two articles explaining the difference between Hard Money and Private Money. Both made essentially the same distinction: a hard money lender is a company with fairly standardized programs, while a private money lender is typically an individual lending their own money with more flexibility to negotiate the terms. It was the iteration of making a definite distinction between these two terms that we feel needs to be addressed, otherwise it could limit ones understanding of potentially beneficial financing solutions!
We understand where that distinction comes from and there certainly are lenders that operate exactly that way. But having worked in the private lending industry for almost 20 years now, there is a broad definition of “Hard Money” and “Private Money” that need to be considered, otherwise it leaves out a pretty important part of the story.
In California, these terms have historically described much of the same lending world.
The California Department of Real Estate itself explains that loans funded by private investors and secured by real estate have historically been referred to as “hard money loans”. It also notes that over time, the traditional term "hard money" has increasingly been replaced within the industry by "private money."
So, if you have heard these two terms used interchangeably, you are not wrong and shouldn’t be confused. There is a reason for this!
Same Neighborhood, Different Names
Real estate lending has plenty of terminology like this.
We see it all the time with the words "bridge loan." Someone will call and tell us they need a bridge loan, and once we hear the scenario, what they really mean is that they need short-term financing to get from Point A to Point B. Our “private money bridge loan” has 3 exact program guidelines that can be offered and these may or may not fit the specific type of bridge loan program the individual originally had in mind.
The terminology helps start the conversation, but the actual transaction or scenario tells us what exact financing options are available!
Hard Money and Private Money are similar.
Historically, Hard Money generally refers to non-conventional real estate financing secured primarily by the property and funded outside the traditional banking system. Private Money describes where that capital comes from, namely directly from an individual private lender (also known as a private investor) or other private source rather than a conventional bank.
In practice, those two descriptions overlap considerably. Which is why a company can also be referred to as a “Private Money lender”.
The capital does not suddenly stop being private because there is a licensed Broker and lending company coordinating the transaction, as is required by California law.
Where the Distinction Can Be Useful
There is one part of the articles we recently read, that we do think is useful.
Different lenders can operate very differently.
An individual investor lending their own funds may be willing to structure a loan one way. A larger private lending company may have established programs and multiple underwriting guidelines – because every private investor they work with has their own way of underwriting! Another lender may specialize only in fix-and-flips, while someone else may lend on owner-occupied properties, land, commercial real estate, refinances or bridge transactions. Some lenders are highly flexible while others have very specific guidelines they adhere to.
But that is the difference between “lenders” and “finance programs”. Not necessarily the dividing line between the words “Hard Money” and “Private Money”.
That distinction matters because someone reading that "hard money lenders are companies and private lenders are individuals" may walk away believing they already know what financing is or is not available to them. This is what we want to avoid!
We want to ensure homeowners, homebuyers, real estate agents and conventional mortgage brokers know that there are various creative real estate mortgage options out there.
And unfortunately putting limitations on the terms “Hard Money” and “Private Money” can get in the way of this.
What Does Hard Money or Private Money Actually Look Like?
While programs vary from lender to lender, there are some common characteristics.
In our California real estate lending industry, these loans are always secured by real estate, placing significant emphasis on the property’s value and available equity. They are generally shorter term than conventional mortgages (think 11 months to 5 years), usually carry higher rates than traditional bank financing, and can frequently be funded much faster than traditional home loans (think a couple weeks or less at times)!
They are also known for flexibility, creativity and forgiveness.
These attributes are one of the reasons borrowers and real estate professionals turn to Private Money when a conventional loan does not line up with the purchase or refinance transaction. Maybe someone needs to close quickly. Maybe they are self-employed and their income does not fit neatly into conventional underwriting. Maybe they need a bridge loan between their current primary residence and a new home, or they want to access equity for quick business capital, are purchasing an unusual property or simply have a scenario that needs to be looked at differently.
Those are the situations where the conversation becomes much more important than the label!
How We Use the Terms
For us, Hard Money and Private Money describe the same general area of real estate lending. These are completely interchangeable terms in our industry.
Pacific Direct Mortgage is a direct Private Money lender. Mortages are funded directly through our network of individual private investors. We do not take the loan and broker it out to an unrelated bank, mortgage company or outside lender.
If someone reaches out and says, "I need a hard money loan," we know exactly what they are talking about and will immediately gather needed information so we can provide a free mortgage quote.
We don’t bother debating about which term should be used. We would much rather see if we can help them with their creative home loan request.
The Pacific Direct Bottom Line
Hard Money and Private Money have an established history of being used interchangeably in real estate lending, particularly here in California. Over time, Private Money has simply become a more common way of describing financing that comes from private capital rather than traditional banking sources.
That does not mean every Private Money lender works the same way. Far from it. Programs, underwriting, rates, property types, loan amounts and flexibility can vary considerably from one lender to another.
And that is really the takeaway.
Do not worry too much about whether you are using the "right" term before picking up the phone or reaching out online. If you have a property, equity and a financing need that does not seem to fit the traditional route, tell us what you are trying to accomplish and we will see how we can help!
Whether you call it Hard Money, Private Money or simply another way to get the deal done, we are happy to take a look.
This is just another reason we’re the Private Money Lender everyone’s starting to talk about.
Husband & Wife Team Phone: 707‑708‑0797 / Office: 1400 N. Dutton Ave #22 Santa Rosa, CA 95401 Ken: CA DRE Broker #01858042 / NMLS #1221130 Ari: CA DRE #01858152 / NMLS #2170867 Ken & Ari are a husband & wife team with combined 3+ decades in real estate and private money industries. They own Pacific Direct Mortgage & Real Estate, specializing in Private Money loans (also known as Hard Money home loans). Having helped thousands of Borrowers & working directly with Brokers, Agents and Lenders to help when needed with fast, flexible, alternative financing for real estate purchases and refinances throughout California. No issues with DTI ratios, credit issues, property condition, difficult to prove income ‑ we want to help
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