In this video, Eric Larson, founder of Northwest Private Lending explains the difference between hard money vs. soft money.
Okay. Let’s start with private money lending. At the end of the day, a private money loan is just a loan from one individual to another. It can be a loan from your mom, your uncle, a stranger. I t’s one individual making a loan to another individual. And why is that important? The person you borrow from makes a big difference. If you borrow from your mom, she might not charge you any interest. You borrow from a company, they probably will. And what are the terms? How long are they gonna do the loan? What happens if you can’t make a payment? The type of person you borrow from is going to vary in the private lending space. So my recommendation to you is: know who you’re borrowing from. Read reviews, get a recommendation. Meet the person. If you’re going to be borrowing money from someone personally, it’s great to have the opportunity to know who that person is and how they’re going to treat you.
So Hard Money. If Private Money is describing where the source of capital is coming from, The hard money is describing the type of loan. Hard Money Loan is just another word for an asset-based loan. In the same way that you have a 30 year fixed loan from a bank, an asset-based loan is a loan that’s really collateralized by the asset or the equity in the Property. Asset based loans are not going to be high loan-to-value. In general, the borrower is going to need to come with some sufficient capital to put down the property, or they’re going to have to have sufficient equity in the property that they own, if they’re getting a refinance. Hard money loans are going to be easier because we’re just looking at the property.
Is there sufficient equity in the property to do the loan? And is there a good exit strategy for you to get out of the loan either by selling the property or refinancing with a conventional lender later? We don’t care so much about your taxes or your credit score your bank statements.
At the end of the day, the asset should speak for itself in a hard money loan. Another thing about a Hard Money Loan is it’s generally business purpose in nature. Hard Money lenders are not really going in the space to go making loads of people’s primary residences.