Needing private financing for a project but this is your first time? Private lenders step in when banks and mortgage companies stand aside when the project needs too much renovation for their taste. There are two types of private loans and some private lenders offer both or they specialize in one or theprivate vs. hard money other. The main differences between the two are the quality of the project as well as the borrower. Here are the differences between the two.

A private lender, like any other, evaluates the property’s prospect as well as the credit and capacity of the borrower to repay the loan when due. These private lenders assign more risk to the property’s current and future condition while still relying on good credit and verifiable income. Borrowers seeking these loans need to be able to provide their financials and have their credit reviewed in addition to having the property make it through the lender’s evaluation process.

On the other side are private lenders who also consider properties in poor shape but pay more attention to the profitability of the project while allowing for less than stellar credit. These so-called “hard money” lenders compare the initial purchase price, costs of renovation and if the completed property will sell for the amount the investor claims it will sell for. As such, a hard money private investor will offset the credit and income risk with additional equity upfront. Down payments of 40 percent or more are the norm rather than the exception. Investors can also expect higher rates and fees compared to private lenders who cater to the well-heeled client.

Private lenders issue their own internal lending standards and can require pretty much any guideline they want as long as they apply their standards universally with adherence to fair lending standards. Private lenders are much more common today than there used to be as banks tightened their purses so a profitable vacuum appeared and money naturally followed.