What is the difference between private lending and hard money lending?

Private lending and hard money lending are both alternative forms of financing for real estate investments and these terms are often used interchangeably, but there are some key differences between them that investors should understand. Typically, the three major factors dividing these types of lenders are who is providing the money to be lent, who has the final authority to approve a loan, and how you find these lenders. Private Lending

Private lending generally refers to the process of borrowing money from an individual or a group of individuals, rather than a traditional bank or financial institution. Private lenders can be family members, friends, or other investors who are looking to earn a return on their investment by providing you with a loan for your real estate project. Private lending is typically less formal than traditional lending and can be more flexible in terms of loan terms and requirements. Private lenders often handle the entire loan process themselves or with a very small group of other investors and are the final decision makers on all underwriting and funding. They are usually working with a smaller pool of money however they can often close deals far faster than traditional lenders. These investors are more likely to lend to borrowers with whom they have a relationship and trust. They are less likely to advertise their funds or lend in all 50 states, and they may not have the funds available to meet your borrowing needs at the exact time that you are looking for a loan. You find these lenders through networking and building relationships. There are many more private lenders than most people think, they just don’t flaunt their status as a lender as this often leads to unwanted attention from strangers. Hard Money Lending

Hard money lending, on the other hand, is a specific type of private lending that involves borrowing money from a larger private lender who is focused solely on real estate investments. Hard money lenders are typically professional investors who specialize in lending money for real estate deals, are typically backed by institutional money, and usually can be located through a Google search. They often charge higher interest rates than traditional lenders but can often provide financing more quickly and with fewer requirements. Unlike private lenders, they often are part of a larger organization that will have several employees fulfilling different functions (loan officer, loan processer, underwriting, closing, etc.) The loan will likely need to conform to the standard set by the company and they may not have the ability to adjust terms or make final underwriting decisions with the same latitude that a private lender can. However, they are working with a larger pool of money and may be able and willing to lend in all 50 states. Hard money lenders may be more impacted by overall economic trends, especially if their business model relies upon selling mortgages on a secondary market. Hard money lenders are less concerned with personal relationships and more concerned with a loan fitting within their company’s standards.

You will usually be able to spot if you are working with a hard money lender versus a private lender if the relationship starts with an internet search and online application available to everyone in all 50 states versus a conversation with an individual who controls the funds directly. Both types of non-conventional lenders have their pros and cons. Choosing which type of lender to use is entirely dependent upon your needs as a borrower (deal location, borrower timeline, type of deal, etc.) and your ability or interest in networking and building relationships.