Hard money and private money are frequently used interchangeably as a way to refer to alternate financing for real estate purchases. However, they aren't always the same. Some private money gets made on loans that look and act like traditional financing, while a hard money definition should include non-private funds.

Hard Money Definition

A hard money loan is usually a short-term financing arrangement that is tied to the asset. While hard money lenders may choose to use similar qualifying processes to other lends, many put their primary focus on the value of the collateral. Since they are lending primarily based on the collateral, hard money lenders frequently require relatively large down payments in the neighborhood of 40 percent of the property's value. This not only ensures that there is enough equity in the property to pay off the loan if the borrower doesn't pay, but also gives the borrower a strong incentive to pay because they have a lot to lose.

Hard money lenders typically charge higher interest rates and fees than traditional lenders because of the relatively risky nature of the loans they make. On the other hand, they also offer relatively liberal qualifying terms. As asset-based lenders, many will eschew checking a borrower's credit score. Some are much less picky about the assets they will lend on, adopting the position that any property that has adequate value can be financed. Finally, hard money lenders frequently offer the ability to close very quickly.

While many hard money lenders are funded by private investors, they don't have to be. Some hedge funds provide money to hard money lenders, and even traditional lenders can offer hard money-type lending if they choose.

Private Money Definition

Private money refers to a loan that comes from an individual investor or pool of investors as opposed to coming from a financial institution or a fund. Frequently, private investors will fund hard money loans as a way of earning higher returns than they could get from other fixed income investments, which is why the two terms are sometimes used interchangeably.

However, private investors can fund loans of any type. Technically, an owner financed property is also an example of private money financing. Private mortgages can also be long term and credit based, instead of being short term and asset-based.