Hard Money vs Private Money Loans: Know the Difference

Businessman counting out cash for loan

Do you know the difference between private loans and hard money loans? If you’re interested in real estate investing, it’s important to know the difference. While they each have their similarities, there are quite a few distinctions between the loan products that house flippers must know. Keep reading to discover why hard money lending in Houston, TX, is a better option for real estate investors.

Credit Scores

A lot of people with less-than-perfect credit scores want to get in on real estate investing opportunities. Renovating and flipping houses is a great way to build wealth when it’s done correctly. However, many people who have the skills to do the job well lack good credit. If your credit is holding you back from opportunities, Houston, TX, hard money lending might be the answer.

Private loans that are managed by traditional lenders like banks and credit unions have strict credit requirements. If you have a credit score below 700 or 650, it’s harder to get approved for a loan. Hard money loans have fewer credit restrictions because they are more interested in the property’s value. That being said, if the property doesn’t have equity or isn’t worth much in the market when it’s fixed up, the lender may pass on the deal.

Interest Rates

You’ve probably heard that interest rates are higher for hard money loans than private loans. This is true, and there’s a very good reason for this. Ideally, when a person applies for a hard money loan, their goal is to pay the loan back within 6 months to 3 years, depending on how fast they’re able to move the property. People who take out private loans aren’t usually investing in property they’re going to sell for profit within a few years. Instead, these are your traditional home buyers.

When dealing with hard money lending in Houston, it’s important to understand that private loans have a longer period to collect interest payments. Therefore, the rates appear to be substantially higher for hard money loans, but it all equals out in the long run.

Process Timelines

Money lending in Houston doesn’t always go as fast as you need it to for an investment property, if you’re trying to get a private loan. That’s why investors choose hard money loans. The private loan process can drag out for months and require a lot of paperwork and verification.

With hard money products, the lenders want the process to go as quickly as you do because they want to see a return on their investment as quickly as possible. Whereas private loans might take 1 to 3 months to fund, hard money loans can be funded in as little as 7 days, depending on varying factors.

Interior of home with fixer upper stamped over

The Bottom Line

So, which loan product is best for you? It all comes down to why you’re buying the property. If you’re a real estate investor looking to make quick cash on a “flip” house, then hard money loans are the better deal. They’re easier to get with less-than-perfect credit, and the funding process isn’t as long. For people buying their forever home, it’s a better deal to go the private loan route and find a lender offering great 30-year or 15-year interest rates.

To learn more about money lending in Houston, TX, contact Investor Loan Source today for commercial, rental, and fix & flip loan options.

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