ABOUT HARD MONEY LOANS
There seems to be a lot of mysticism and confusion surrounding exactly what is meant by private money loans (also referred to as "hard money loans"). The boundaries have blurred a little in the past ten years, but the basic idea of private money lending is that private individuals who have money to invest choose to loan that money, generally on real estate secured transactions, with the desire to receive a fair return (commensurate with risk) on their investment. Some private investors go on to form a corporate entity, and utilize lines of credit as a source for the funds that they loan - and this is where the boundaries begin to become a little hazy (as these private investors may begin to look a little like institutions).
Perhaps more important as a defining characteristic of private money is the process and criteria by which the money is allocated to loans. Private money is quite different than institutional money in the following ways:
- With private money lenders, there is generally greater flexibility with regard to the types of loans and circumstances under which money will be lent.
- The strength of the collateral is generally more important to hard money lenders than the qualifications of the borrower (though both are always considered).
- It is generally possible to place hard money loans very quickly. Income verification is rarely required, and appraisals are often not required.
- Hard money loans tend to be more expensive than institutional loans.
- The loans tend to be of shorter duration (5 years maximum in most cases).
There is one myth about private money lending that is prevalent but badly mistaken, so it should be put straight here:
Private money borrowers are generally desperate borrowers, in trouble, and without options.
Private money borrowers are, most often, solid individuals or businesses that have circumstances or opportunities that do not fit well into the rigid structures of institutional lending, and require speed or flexibility unavailable through more conventional means.