Over the last few years real estate investment has been on an upswing in the USA. However, getting the necessary capital from traditional lenders or banks has become all the more difficult for investors with undocumented income or bad credit scores. This disconnect has given rise to a new banking community in the form of hard money lenders and/or private money lenders that provide the funds to real estate investors who focus their underwriting more on the asset itself than the borrower’s previous credit history.
Although hard money loans are typically more expensive than those provided by Fannie Mae and Freddie Mac, private capital can be a great alternative for the investor as it significantly more flexible. For smart investors who only need to borrow for a short term, private loans afford them the oppotunity to make deals that may otherwise not have been possible.
The two non-traditional lending sources that are regarded as the best by the investors can be confusing. Although hard money loans and private money are similar in many aspects such as:
- Both are a part of non-traditional lending institutes
- Both are powered by the strength of real estate purchase
- Both needs returns in a couple of years and at high interest rate
Let’s understand first what the hard money loans and private money loans are:
Hard money loans: Hard money lenders are the organized form of non-traditional money lending community who lends money based on certain criteria. Hard money loans are primarily based on clearly defined terms such as: interest rate, length, amortization and loan-to-value ratio. Hard money lenders will also record a debt instrument against the property called a “deed of trust” in California (or mortgage in other states). Most states also require hard money lenders to be licensed.
Private money loans: Private money lenders work exactly like their name. They offer loans private loans to investors, often don’t record debt instruments, and the investment can be in terms of debt, equity, or both. They also tend to provide higher amounts, sometimes even equal to the value of the property itself.
So let’s get to it: Here are the differences between the hard money loans and private money loans:
- License is the key
In the USA, there exist professionals that have proper license to lend money to real estate investors. Such experts can be easily found through directories or advertisements to provide hard money loans in California. The hard money lenders assess whether you are a good fit for the loan or not, manage the loan procedures and do all the necessary negotiation as well.
On the other hand, the private lenders are not the legal lenders who don’t have any sort of license. Instead, borrowers have to search them as they won’t advertise. The chances of more negotiation are possible with private money lenders.
In the hard money loans, legal proceedings are done before the loan is issued, and they have already set loan durations, and interest rate, which cannot be negotiated at any cost.
For private money loans, nothing is pre-defined, and the terms and interest rate is generally cheaper as opposed to hard money loans but can be offset by requiring a larger equity portion. This won’t happen always, but possible in some cases.
- Availability on-the-fly
Hard money lenders in California do advertise about the loan and services they offer, so it becomes quite easy to reach them out. While private money lenders are the intermediaries who never advertise so they are difficult to find because they are not running any lending business.
Wrapping it up
The alternative options to traditional bank loans are really great for real estate investors. Now, the two – hard money loans California and private money loans are scoring popularity in the market, and you have gained enough understanding about both. So, what will you choose for your next real-estate project? Let us know your views in the comments below.