Purchasing your first home is a huge step for Americans looking to achieve financial independence. For most Americans, this means taking on a mortgage.
In order to qualify for a traditional mortgage through a bank or lending institution, borrowers must have a good credit score. Considering that estimates indicate more than 30% of Americans have poor credit, this can be a difficult roadblock.
Luckily, there are options for all borrowers, even if they have poor credit. Private lending and hard money loans serve as alternatives to banks and mortgage brokers.
But what are the differences between private lending and hard money loans? Let’s take a closer look.
First, let’s look at the definition of private lending and hard money loans. This will make it easier to understand what makes these loan options different.
Traditionally, folks turn to a bank, credit union, or mortgage broker when they need a home loan. Both private lending and hard money loans are non-traditional sources for mortgages. Borrowers can usually choose a short-term or a long-term loan with either option.
A private lender is exactly what it sounds like–a private source of a loan. This might be a friend, family member, or business associate. In other cases, private individuals may take personal or professional referrals for loans.
If you decide to go through a private lender, you will have to work out the terms of the loan with that individual. The flexibility of the terms is dependent on the agreement you come to.
Hard Money Lenders
While hard money is also a non-traditional source of a home loan, it is more structured than a private loan. Hard money lenders are organized institutions that are usually licensed to provide loans.
Because of this, hard money institutions usually have more criteria that you must abide by to qualify for a loan. These loans have defined durations, interest rates, and other upfront points. All of these criteria will be agreed upon before the loan is finalized.
Typical home loans are secured with a down payment and are only available to folks with a strong credit history. By contrast, hard money loans are secured by the actual piece of property the loan is being used to purchase.
For this reason, the amount of the loan will be determined by the value of your property. Additionally, the property will serve as collateral if you fail to pay back the loan.
Also, with these loans, you will typically only pay interest in your monthly payments or interest with a small amount of principal. At the end of the loan, you will owe a larger balloon payment that will cover the remaining principal. Additionally, the interest rate is usually higher with a hard money loan, since the institution is looking to minimize its risk.
Differences Between Hard Money and Private Loans
Now that we’ve established what hard money and private loans are, let’s take a closer look at some of the differences between them.
Terms of the Loan
One of the main differences is that private lending is more flexible. Because you are not going through an institution, you will be able to negotiate all of the terms yourself. By contrast, with a hard money loan, you will need to work within the institution’s regulations.
Additionally, private loans are often cheaper than hard money loans. This is because hard money institutions typically get money from a private third party. In order to make a profit, they must charge a higher interest rate on their loans.
By contrast, with a private loan, you are not going through any middleman. For this reason, you may be able to negotiate a lower interest rate. Of course, you will need to be confident in your own negotiation skills to get a good loan.
That said, private money loans are harder to find. For instance, the average cost of a home in the Atlanta area is around $200,000. Most people do not know someone who both has $200,000 to lend, and who is willing to lend out that money.
By contrast, hard money lenders are relatively easy to find with the right research. Most hard money lending institutions advertise their services. After all, this is how they make their profits.
When you work with a private lender, there is usually more risk involved. The only protection for your loan is the protection that you and your lender work out.
By contrast, a hard money lending institution usually works with brokers and lawyers to protect both the lender and the borrower. This will make the borrower bound to pay back the money, and the lender bound not to change the terms of the loan.
So, if you decide to go through a private lender, it is not a bad idea to find a lawyer yourself. This will protect you if the lender tries to change the term of the loan without your consent.
Which Loan is Right for Me?
Ultimately, there is no single answer to whether a private loan or a hard money loan is a better option. Rather, it depends on what your specific needs are as a borrower.
If you know someone who you trust who is able to act as a private lender, a private loan may be a good option for you. If you are not sure, however, you may be better off with a hard money loan.
A hard money loan will provide more stability and security than a private loan will. In spite of the additional restrictions that come with a hard money loan, the lesser risk provides a benefit.
Find Atlanta Private Lending and Hard Money Options
With these options in mind, your credit score will not prevent you from getting the home loan you need. Depending on your specific situation, Atlanta private lending or hard money might be the best option for you.
If you would like to learn more about Atlanta private lending and hard money options, contact us. We’ll work with you to find the perfect solution.