Private Money Loans Vs. Hard Money: What's The Difference?

Published Nov 01, 21
4 min read

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Interest Rates and Points for Hard Money Loans The interest rates and points charged by hard money lenders will vary from lender to lender and will also vary from region to region. For example, hard money lenders in California generally have lower rates than other parts of the country since California has many hard money lending firms.

Hard money lenders take on more risk with their loans compared to a conventional bank loan. Due to this higher risk involved on a hard money loan, the interest rates for a hard money loan will be higher than conventional loans. Interest rates for hard money loans range from 10 – 15% depending on the specific lender and the perceived risk of the loan.

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The interest rates and points may vary greatly depending on the loan to value ratio. Hard Money Loan to Value Ratios The loan amount the hard money lender is able to lend is determined by the ratio of the loan amount divided by the value of a property. This is known as the loan to value (LTV).

Some lenders will lend based on the after repair value (ARV) which is the estimated value of the property after the borrower has improved the property. This creates a riskier loan from the hard money lender’s perspective because the amount of capital put in by the lender increases and the amount of capital invested by the borrower decreases.

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There are some hard money lenders who will lend a high percentage of the ARV and will even finance the rehab costs. This may sound great from the borrower’s point of view to begin with, but these types of loans have a much higher risk involved and the interest rate and points will be MUCH higher.

In some cases, it may be worthwhile for the borrower to pay these exorbitant rates in order to secure the deal if they can still generate profit from the project. Borrower Requirements for Hard Money Loans As discussed earlier, hard money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral.

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Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan. The hard money lender must also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to ultimately pay off the loan.

Finding a Hard Money Lender to Work With There are many different ways to find a reputable hard money lender. One easy way to find a local hard money lender is to search Google for [your area] + “hard money lenders”. There will be individual companies in the search results as well as lists of hard money lenders compiled by others.

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Another way to find a hard money lender is by attending your local real estate investor club meeting. These club meetings exist in most cities and are usually well-attended by hard money lenders looking to network with potential borrowers. If no hard money lenders are present at the meeting, ask other real estate investors if they have a hard money lender they can recommend.

Hard Money Loans A Hard Money Loan is also called an Asset-based loan because the underwriting (decision to make a loan or not) is primarily based on the equity or value of the property in which the loan is being made. A hard asset is the “HARD” in Hard Money).

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Hard Money loans are most commonly business purpose in nature which means the loan is being made on an investment property like a home that is being rented or a commercial building. Hard Money Loans, Fix and Flip Loans, Rehab Loans, are designed for investors who are purchasing distressed real estate at a discount and need cash to close.

If they plan to hold the property they will commonly go back to the bank and get a refinance at a lower interest rate after the completion of the rehab. If they want to flip the property, then the goal will be to be to buy the property at a discount, fix it up, and sell it quickly.

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Much less required documentation to get a loan Less regulation allows for different qualifications to get a loan approved – The lender sets the qualification terms not the government and they can decide what makes you a good candidate to lend to. Cons of Hard Money: Expensive – Because a private lender is generally using their own money, they determine the interest rate which can vary a lot.