Part of the confusion surrounding this topic is there is no hard and fast “rule” as to how the terminology is used. There isn’t really a definition of hard money vs private money: it’s simply a naming convention. Hard money sounds, well, hard. Scary. So lenders shy away from it.
A hard money loan is a loan collateralized by a hard asset (real estate.) Therefore, a hard money lender is a lender who uses the value of the underlying real estate to determine his loan amount and rate. A private lender, however, will use whatever criteria he is comfortable with, such as “he’s known you since diapers” and trusts you. Both are non-institutional lenders, meaning they are not regulated banks.
Who they lend to
First, your grandma believes in you and wants to lend you money for the down payment. She would never lend to anyone else, and won’t charge you much, either. She’s clearly a private lender. Your dentist has known you for years, and has several real estate investments himself. He has lent money to one other client, also a real estate investor, and is willing to fund your deal, but doesn’t want you advertising his services to others. He’s a private lender, not available to the general public. Now, take that same dentist, but now his real estate attorney brokers deals to him. He wants more clients and wants you to spread the word. Consider him a hard money lender when the pool of borrowers could be anyone who meets his criteria, not just friends and family.
Rates, terms and advertising
If their rates and terms are similar to or in the same ballpark as other hard money lenders, consider them a hard money lender. If they advertise, or stand up at a real estate group and say they lend, consider them a hard money lender. Your grandma won’t be standing up there!
In today’s common usage, a hard money lender advertises his/her services, has a process you need to follow to be considered for a loan, and is available to any borrower meeting the established criteria. A private lender is someone you know, who doesn’t lend to the general public, and may (or may not) charge less than the going rate in your area.
Don’t be misled by hard money lenders calling themselves private lenders just to sound cheaper or less scary. I can call myself Queen Elizabeth, but that doesn’t make it so. Evaluate each lender based on your needs, their reputation in your local area, and their ability to deliver what they say. Integrity matters.
If you wish to ask more questions, here’s your chance! A lending panel Q&A event in November.