Private Lending Resources

The Difference Between a Hard Money Lender, Direct Lender, and Private Lender

January 10, 2024

Are you a real estate investor in need of creative financing solutions?

RoseRock, an experienced private money lender, understands the challenges of financing a real estate project and finding the best real estate private lender in Texas.

There are many confusing aspects to finding the right real estate private lender for your project and financing options that are best suited to the needs of you and your real estate venture.

Clarifying some of the differences between lenders is a good place to start.

What’s the difference between a hard money lender, a direct lender, and a private lender?

We’ll start with defining hard money.

group in business meeting
What is a Hard Money Lender?

In short, hard money is a type of loan product. Lenders often call themselves hard money lenders if this is the only type of loan they offer. An important distinction when it comes to a hard money lender for commercial real estate is that how they get funds to originate loans will be different depending on the lender. It’s necessary to do your due diligence between lenders because it’s possible for you to encounter someone calling themselves a hard money lender who gives no information about their business model. You don’t want to get caught in a financial situation with someone who isn’t reputable.

It’s a good idea for borrowers to develop a relationship with their lenders and know how they obtain funds to originate loans. The source of a lender’s funds can greatly impact borrowers, especially during economic downturns such as the first twelve months of covid. Many lenders who relied on selling their loans on the secondary market to institutional investors were not able to originate new loans because those institutional investors stopped all secondary market buying, which in turn did not allow the originating hard money lender to turn around and make new loans.

Examples of these types of institutional investors are REITs, life insurance companies, and large private equity firms. However, lenders who knew their capital sources directly or had in-house equity sources were able to continue originating new loans.

You don’t want this to happen to you, so it’s important you develop a relationship with and know the background of your hard money lender.

A hard money loan is a commercial loan for business purposes, as opposed to a consumer loan or a traditional home mortgage loan. Because of this classification, hard money lenders have a lot of flexibility in how they conduct business, as the hard money lenders are not required to report to a regulatory body unlike traditional lenders. It’s essential to know your lender well; know their history, integrity, and how they conduct business.

Two professionals in a coffee shop meeting
What is a Direct Lender?

A direct lender is a person or company where the entity originating the loan will keep the note in-house instead of brokering the loan out to another lender.

If a firm or loan officer advertises themselves as a direct lender, then they should have the appropriate funding sources readily available in-house to originate a loan, even if they plan to sell it within the next six months on the secondary market.

However, if a firm doesn’t advertise themselves as a direct lender, they may still be one but could also be a loan broker.

A loan broker is someone who has an end lender who has agreed to fund the loan and typically pays the broker a referral fee for bringing them the new business. The loan must fit within the end lender’s underwriting criteria, and ultimately, the loan structure and terms are based on the end lender’s offering. This is typically used as a marketing term that experienced investors more easily recognize to decipher if they’re working with a middleman or the decision maker.

group of professionals in business meeting
What is a Private Lender?

A private lender is a term used when the lender uses their own funds or investor equity they’ve raised to originate loans. Private lenders typically do not broker loans or sell loans on the secondary market, but they will hold all loans in their portfolio until the loan is paid off. These types of lenders often have the most flexibility when originating new loans, servicing loans, and processing loan extension requests.

Within the alternative lending industry, it’s generally accepted that someone who advertises themselves as a private lender uses their own source of funds to originate and fund loans.

In summary, a lender marketing themselves as a hard money lender is referencing the type of loan product offered, a direct lender is clarifying they are not a broker and will originate the loan in-house, and a private lender will originate the loan in-house and typically hold the note in their portfolio until it is paid off.

The above terms are important for you to be familiar with if you’re looking for a private loan vs. traditional financing.

All of the above terminology is developed and generally accepted within the alternative real estate lending industry, but it can be used for other purposes since there’s no requirement or regulation to use these terms. This contrasts with traditional mortgage lenders, who must obtain and provide an NMLS license number to conduct business.

That shouldn’t cause you to shy away from exploring and using a private money lender for real estate. However, it does mean you need to do your research and know that the lender you’ve chosen to work with is reputable and can adequately fund your project.

Private lenders such as RoseRock have built a positive reputation because they provide reliable direct loans with a “partnership mentality,” meaning they’re invested in the project from start to finish.

There are many lucrative real estate investment opportunities available in Texas. Start researching private lenders today and get your project started.

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