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Hard Money FAQs
Find answers to the most common questions about private money loans and hard money lending. The terms private money and hard money are used interchangebly throughout this article and are considered synonymous.
Aren’t hard money lenders “shady”?
Hard money lending has a well-deserved stigma. There were previously many bad apples in the business. But like any business, hard money had its good and bad lenders and as the business evolved over time, there are many more good than bad. The key is knowing how to find the good lenders and the questions to ask to perform your due diligence. So don’t let the stigma scare you. There are a plethora of new “private money lenders” emerging who are well-trained professionals acting in the best interest of borrowers. The hard money lending industry has changed significantly over the last decade and a cottage industry of professionals has emerged which pride themselves on serving as a conduit between private money investors and borrowers seeking funds for real estate projects such as rehabs, bridge loans, commercial lending, land loans, and more.
Where does the money come from in a hard money loan?
As the name implies, the funds come from private investors who are looking to make hard money loans. The source could range from one individual hard money investor to a group of private investors who each fractionally invest in your hard money real estate loan, or a group of private investors who have already pooled their funds and rely on a professional commercial lending asset manager or hard money loan broker to fund loans to qualified borrowers.
Is private/hard money expensive? If so, why?
In general, private/hard money loans are more expensive for a few reasons:
The investor is looking for a better return than they can get in the bond market or in a savings account.
Higher risk = higher rate. So a 20% loan-to-value (LTV) loan on a fully rented commercial building would be far less risky than a residential rehab loan on a 60% LTV fixer bought at a distress foreclosure sale.
Everything is negotiable and it’s up to the hard money lender to find an investor willing to accept the risk.
Is hard money only for desperate borrowers?
Not at all. There are numerous transactions that just don’t fit the conventional lending mold and hard money loans are just another means of financing these transactions. Commercial bridge loans, land loans, and hard money residential rehab loans are all examples of difficult loans to get from a bank.
Are private money lenders out to steal my property?
Most private money lenders have no desire to take your property. They earn their living by servicing your loan on behalf of their investor. If they take your property, the income stream of ½ to 1% of the loan amount per year stops so their incentive is to keep you in the property, not take it.
Where will I make my payments?
You may make your payments directly to the private money lender who arranged your loan or to a separate servicing company. Wherever the payment goes, be prepared for less sophisticated servicing than you’ve experienced with conventional loans. Don’t expect a fancy web site to manage your loan. In many cases the servicing may be done on a ledger card or with basic software that doesn’t give the borrower internet access.
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Disclaimer and Limitations of Use
The contents, text, images, data, forms, articles, questions and answers, discussions, legal and financial information and other materials ("Content") contained and maintained on the Private Money Lending Guide website are for informational or educational purposes only and no Content or portion of this website should be construed as, or relied upon as, legal, financial or investment advice; as the providing of legal, financial or investment services or as the recommendation of forms or of the opinions from author of Content.
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Find answers to the most common questions about private money loans and hard money lending. The terms private money and hard money are used interchangebly throughout this article and are considered synonymous.
Aren’t hard money lenders “shady”?
Hard money lending has a well-deserved stigma. There were previously many bad apples in the business. But like any business, hard money had its good and bad lenders and as the business evolved over time, there are many more good than bad. The key is knowing how to find the good lenders and the questions to ask to perform your due diligence. So don’t let the stigma scare you. There are a plethora of new “private money lenders” emerging who are well-trained professionals acting in the best interest of borrowers. The hard money lending industry has changed significantly over the last decade and a cottage industry of professionals has emerged which pride themselves on serving as a conduit between private money investors and borrowers seeking funds for real estate projects such as rehabs, bridge loans, commercial lending, land loans, and more.
Where does the money come from in a hard money loan?
As the name implies, the funds come from private investors who are looking to make hard money loans. The source could range from one individual hard money investor to a group of private investors who each fractionally invest in your hard money real estate loan, or a group of private investors who have already pooled their funds and rely on a professional commercial lending asset manager or hard money loan broker to fund loans to qualified borrowers.
Is private/hard money expensive? If so, why?
In general, private/hard money loans are more expensive for a few reasons:
The investor is looking for a better return than they can get in the bond market or in a savings account.
Higher risk = higher rate. So a 20% loan-to-value (LTV) loan on a fully rented commercial building would be far less risky than a residential rehab loan on a 60% LTV fixer bought at a distress foreclosure sale.
Everything is negotiable and it’s up to the hard money lender to find an investor willing to accept the risk.
Is hard money only for desperate borrowers?
Not at all. There are numerous transactions that just don’t fit the conventional lending mold and hard money loans are just another means of financing these transactions. Commercial bridge loans, land loans, and hard money residential rehab loans are all examples of difficult loans to get from a bank.
Are private money lenders out to steal my property?
Most private money lenders have no desire to take your property. They earn their living by servicing your loan on behalf of their investor. If they take your property, the income stream of ½ to 1% of the loan amount per year stops so their incentive is to keep you in the property, not take it.
Where will I make my payments?
You may make your payments directly to the private money lender who arranged your loan or to a separate servicing company. Wherever the payment goes, be prepared for less sophisticated servicing than you’ve experienced with conventional loans. Don’t expect a fancy web site to manage your loan. In many cases the servicing may be done on a ledger card or with basic software that doesn’t give the borrower internet access.
Give FeedbackShareThis
Disclaimer and Limitations of Use
The contents, text, images, data, forms, articles, questions and answers, discussions, legal and financial information and other materials ("Content") contained and maintained on the Private Money Lending Guide website are for informational or educational purposes only and no Content or portion of this website should be construed as, or relied upon as, legal, financial or investment advice; as the providing of legal, financial or investment services or as the recommendation of forms or of the opinions from author of Content.
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