Private Lenders vs Banks vs Hard Money Lenders
Private lenders, banks, & hard money lenders are often misunderstood. They're suited for different types of borrowers. Get clarity on how to move forward.
Broadly speaking, investors can choose between private lenders and banks when deciding how to finance a real estate project. Borrowing money from a bank tends to be less expensive, but they are also rigid in their procedures. Private lenders are more flexible with qualification guidelines but may have a higher interest rate. The following offers an overview of your options for real estate investment financing.
What’s the difference between hard money and private money loans?
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Although frequently asked, this is a slightly misleading question because hard money lenders can also be private lenders and vice versa. A lender is labeled as a hard money lender because they put more emphasis on the value of the hard asset when determining who qualifies for a loan. A private lender is simply a lender without government ties.
To be more specific:
A hard money lender uses a “hard asset,” in this case real estate, to determine the amount of the loan and the repayment terms. The hard asset also serves as collateral. Hard money lenders typically have investors of their own who provide money for hard money loans. Hard money lenders can be considered private money lenders.
A private money lender is any lender that doesn’t offer government-regulated loan programs (like FHA, USDA, the SBA, etc) and is likely not a publicly traded company. A private money lender could be a single individual or a business. A private money lender could offer loans based on hard assets (hard money loans).
The main similarity between the two is that both types of loans do not come from a bank. They both tend to be faster, more flexible, and less reliant on credit checks than banks. This is possible because they are not subject to the multitude of regulations that govern banks.
Read more: How Does a Hard Money Loan Work?
Read more: How to get a Hard Money Loan: 5 Requirements
Private lenders vs. banks
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Private loans offer numerous advantages over bank loans, as well as some disadvantages. This may apply to both hard money and private money loans.
Speed: Private lenders don’t have as many legal and regulatory constraints as banks, which allows them to process loans faster. As a borrower, you might not have to deal with the same number of obstacles that you might face applying for a bank loan. Another reason they’re faster than banks is because they usually conduct every part of the loan process in-house with a smaller, more connected team. From origination, to underwriting, and even through servicing, your private lender may do it all.
Read more: Capstone Capital Partners: Who We Are
Flexibility: Banks tend to offer a limited set of loan options. They are not able to take various aspects of your particular situation into account when making a loan to you. Private lenders have much more leeway to be flexible and creative, such as by waiving or adjusting certain fees or penalties.
Less money down: Bank loans are often capped at 70% LTV, leaving you to come up with a large down payment. Private money lenders are often able to loan a larger percentage, going up to 80% or higher in some cases. This allows you to leverage more of your lender’s money. It helps first-time investors start on a small project without a huge amount of capital.
Credit: Banks lean heavily on factors like credit scores and credit history when reviewing loan applications. Private lenders, including hard money lenders, do not consider your credit score to be an important factor if they even consider it at all.
Disadvantages of private lenders
The main disadvantage of a private lender over a bank is with regard to cost. Private lenders generally take greater risks on loans because they are not subject to the multitude of regulations that govern banks. They make up for this higher level of risk by charging higher interest rates.
Additionally, banks often have a higher maximum loan amount. If you’re looking to buy a large apartment complex or shopping mall, a private lender may not have the resources for you.
How do I choose between hard money, private money, or a bank?
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There is no simple rule for determining which type of lender to approach. Too many factors are involved to make overly general statements. You must consider factors like:
The complexity of the project and your investment
Your level of experience as an investor (is this one of your first projects?)
Your available resources to put toward finance costs (do you have a high down payment ability?)
The timetable of the project (do you need to close ASAP?)
If any of the factors above present obstacles with a traditional lender (like a bank or credit union), you should highly consider speaking with a private lender. If none of these factors present issues for you,
Get started with a trusted private hard money lender
You may have been turned down by traditional banks, lost deals due to their delays, or just want a friendlier experience with local experts. You’re likely searching for a private hard money lender like us: Capstone Capital Partners. Tell us about your project by answering a few easy questions online!
