Private Lenders are non-institutional lenders that issue loans to borrowers for the purchase, and sometimes the renovation, of an investment property. Private Lenders, commonly known as “hard money lenders,” issue short-term loans known as private money loans. Private lenders are good for short-term fix-and-flippers as well as long-term investors looking for a rehab project, quick funding, or cash out refinancing.
Looking for a private lender to finance your next real estate investment? LendingHome offers 12-month mortgages with rates between 7-12% and no prepayments penalties. You can get funded in as little as 15 days. Prequalifying online takes just a few minutes.
What are Private Lenders?
Private lenders are non-institutional lenders that loan money to borrowers in the form of a private money loan. These private money loans are typically secured by a real estate asset and used to purchase a house or similar type of property. Private lenders can be anyone from a personal friend to an established private lending company and are therefore called “relationship-based” lenders.
When people think about private lenders, they’re most typically referring to hard money lenders. This is because hard money lenders issue short-term real estate loans used to purchase, and often renovate, an investment property. Hard money loans are good for both short-term fix-and-flip investors as well as long-term buy-and-hold investors. We discuss private lender suitability in the section below.
However, there are technically three degrees of private lenders. Each of the three degrees is based on the relationship between the borrower and the lender. The three degrees are as follows:
Hard money lenders are considered to be “third-party” private lenders, which is the furthest away from a borrower in terms of relationship. However, hard money lenders are considered the best private lenders because they’re the most reliable and have standardized interest rates, costs, fees, and loan terms.
In this article, we specifically discuss hard money lenders as private lenders. This is because hard money loans typically have short loan terms between 1 – 3 years, interest rates between 7% – 12%, and lender fees between 1.5% – 10%. Conversely, private lenders in a borrower’s primary or second-degree circles have loan terms, rates, and costs that vary widely.
Who Are Private Lenders Right For?
Private money lenders are right for many different types of people:
- Short-term fix-and-flippers looking to purchase, renovate, and sell a property within 1 year.
- Long-term portfolio investors who are at their conventional mortgage limit of 4 – 10 loans.
- Buy-and-hold investors looking to purchase and renovate a property before refinancing with a conventional mortgage.
- Long-term investors who can’t qualify for a conventional mortgage, 203(k) loan, or HomeStyle Renovation mortgage, but plan on refinancing once they meet qualifications.
- Short-term and long-term Investors who need financing quickly.
This is because private money lenders offer short-term financing options that can finance home renovations and also have a fast approval process when compared to conventional mortgages. Private lenders often issue loans to short-term investors looking to make money flipping houses. Private lenders also issue both rehab loans as well as traditional hard money loans to buy-and-hold investors looking to purchase and/or renovate a rental property.
Private money lenders, by definition, aren’t banks, financial institutions, or credit unions. Instead, private lenders are non-institutional lenders, both private companies and private individuals, who loan money to other private borrowers. This means that they have fewer regulations, which can be beneficial for borrowers.
The reason why private money loans are potentially advantageous for both short-term and long-term investors is due to the following:
- Low Credit Qualifications – Third-degree private lenders, such as hard money lenders, have a minimum credit qualification typically around a 550 personal credit score. You can check your personal credit score for free here.
- Fast Approval / Funding Process – Private money loans can be approved and issued in as little as a few days. Hard money loans, for example, typically take as little as 3 minutes for prequalification and 10 – 15 days to receive funding.
- Rehab Financing Available – Private lenders like hard money lenders offer rehab financing. For example, hard money loans such called rehab loans finance the purchase and renovation of a property together as a single loan. This is in contrast to conventional mortgages, which require a house be in good condition prior to financing.
However, private lenders and their private money loans also have risks, such as:
- Shorter Payback Periods – Private lenders often require shorter payback periods when compared to conventional mortgages. Typical hard money loans have terms between 1 – 3 years, although it’s not uncommon to see a hard money loan with a 3 – 6 month payback period.
- Potential for Higher Costs – Private lenders typically charge interest rates between 7% – 12% or more, which is more than the 4% – 6% found with conventional mortgages. Further, private lenders sometimes charge lender fees as high as 10%, charge for an independent appraisal, as well as assess fees for prepayment.
Private Lenders’ Rates, Terms, & Qualifications
Since private lenders can come in many shapes or forms, the rates, terms, & qualifications of a private money loan vary widely about the typical rates, terms, & qualifications of a private money loan.
“Savvier private lenders, those in the second or third tier, typically try to stick close to hard money rates. A relationship lender, however, that is, one who is personally connected to a borrower, might be happy with anything over their credit union’s CD rates. Regardless, private lenders usually base their loan terms, interest rates, and lender fees at or around the figures found with hard money loans.”
–Ellis San Jose, private money lender, Westlake Village, California
To help, we’ve outlined the typical private lender rates, terms, & qualifications, sticking close to the general numbers of a hard money lender:
Typical Private Lender Rates, Terms, & Qualifications
Who are Private Lenders Best For?
• Short-Term Fix-and-Flippers
• Long-Term Portfolio Investors
• Long-Term Buy-and-Hold Investors
Best Use for Private Lenders
Cash Out Refinancing
Qualifications Needed for Loan Approval
• Min. Credit Score of 550
• 2x Personal Bank Statements
Maximum Loan Amount
Minimum Down Payment
Points (Lender Fees)
Typical Loan Term
Time to Approval
Time to Funding
Where to Apply
1. Private Lender Best Use
Private lenders are best for the following types of people:
- Short-Term Fix-and-Flippers looking to purchase, renovate, and sell a property within 1 year.
- Long-Term Portfolio Investors who have either reached their conventional mortgage limit of 4 – 10 loans
- Buy-and-Hold Investors looking to purchase and renovate a rental property before refinancing with a conventional mortgage.
This is because private money loans are short-term in nature. Further, private money loans can finance the purchase and renovations of a property together as a single loan. This is known by hard money lenders as a hard money rehab loan.
The best use for a private loan is for a fix and flip project. Fix-and-flippers often seek short-term financing options that allow them to purchase, renovate, and sell a property within a year or less.
However, long-term real estate investors who invest in rental properties can also benefit from private money loans. Long-term portfolio investors, for example, use hard money loans when they’ve reached their 4 – 10 conventional mortgage limit. When this happens, portfolio investors typically sell an existing property and then refinance their private money loan with a new conventional mortgage at a later date.
Long-term buy-and-hold investors, such as landlords, also use a hard money rehab loan to purchase and renovate a property before renting them out to tenants long-term. They are even used to finance multifamily properties when renovations are needed because conventional mortgages often don’t fund renovations.
To circumvent this problem, buy-and-hold investors use a private money loan to purchase and renovate a property. Afterward, they find tenants to fill the property and then refinance to a conventional mortgage to pay off the private money loan.
Private lenders can also be used by the following:
- Investors Who Need Quick Financing to compete with all-cash buyers
- Investors Who Don’t Qualify for Conventional Mortgages and need a short-term alternative while they increase their personal credit score.
Private money loans are good for both short- and long-term investors in need of quick financing to compete with all-cash buyers. In this case, investors use a private money loan to purchase a property before refinancing to a conventional mortgage at a later date.
Private money loans are also used by both short- and long-term investors who cannot qualify for conventional mortgages. When this is the case, borrowers use a private money loan to purchase a property and wait until they qualify for a conventional mortgage before refinancing and paying off the private loan.
Further, private money loans can fund the following property purchases:
- Single-family homes in most conditions
- Multi-unit properties in most conditions
- Apartments and condos in most conditions
- Commercial real estate in most conditions
In fact, hard money loans are often the best financing options when it comes to properties such as:
This is because these types of properties tend to move quickly and investors often have to compete with all-cash buyers. The quick prequalification time and time to funding of a hard money loan allows investors to purchase these types of houses.
2. Qualifications for Approval
Private lenders have standardized loan qualifications for private money loans. A national lender hard money lender will expect to see the following during prequalification:
- Credit Score of 550+ (click here to check your credit score for free)
- 2 – 3 Months of Bank Statements
- Property Location & Expected Purchase Price
Afterward, borrowers are expected to provide their lenders with the following in order for approval and funding:
- Purchase Contract stipulating the agreed purchase price and terms of sale
If the borrower is seeking a hard money rehab loan, hard money lenders will also want the following in order to approve and fund the renovation budget:
- CV Detailing Experience and Prior Projects
- Renovation Scope of Work
- Contractor Bids
There is no limit to a number of private loans a borrower can take out. Further, hard money loans can either finance a house in good condition or finance the purchase and renovations of a house in poor condition.
3. Private Lender Loan Amount and Down Payment
Private lenders will most typically loan out an amount equal to a percentage of a property’s loan-to-value (LTV) ratio or its after-rehab-value (ARV). For example, hard money lenders usually offer private money loans up to:
- 90% of a property’s LTV
- 80% of a property’s ARV
A property’s LTV ratio is a loan amount based on a percentage of its initial purchase price, similar to a conventional mortgage. A property’s ARV ratio is a loan amount based on the expected fair market value (FMV) of a property after renovations are completed.
It’s therefore common for private lenders such as hard money lenders to issue loans based on LTV for a property in good condition and loans based on ARV for a property in poor condition. Traditional hard money loans, for example, are based on LTV while Rehab loans are based on ARV.
When it comes to a private money loan’s down payment, private lenders, typically like the borrower to have skin in the game. This protects private lenders like hard money lenders from default. It’s therefore common for private money borrowers to invest their own cash when working with private lenders, up to:
- 10% or more of LTV
- 20% or more of ARV
4. Private Lender Interest Rates, Costs, & Fees
Private lenders such as hard money lenders typically issue loans with interest rates, costs, and fees that are similar to the following:
- 7% – 13% interest rates
- 1.5% – 10% lender fees
- 2% – 5% in closing costs
- $300 – $400 independent appraisal
The interest on a private money loan is typically assessed as interest-only payments. This means that private money borrowers pay monthly interest throughout the term of the loan and then make full repayment at the end of the loan.
Monthly payments aren’t amortized like a conventional mortgage. However, while the interest rates on a private money loan might be higher than when compared to a conventional mortgage, the monthly payments might actually be less.
This makes private money loans a great option for fix-and-flippers looking to reduce their holding costs while they prepare a property for sale. It also makes private money loans advantageous for buy-and-hold investors since the monthly payments don’t cost much as they look to refinance with a conventional mortgage alternative.
Private lenders also might charge lender fees, known as “points,” between 1.5% – 10%. Hard money lenders will typically have lender fees that start high and then decline as the loan amounts get larger. LendingHome, for example, has the following lender fee structure:
- 2.5 points: Loans between $120,000 – $249,999
- 2 points: Loans between $250,000 – $499,999
- 1.5 points: Loans $500,000+
LendingHome also has a minimum floor of $3,000 for loans below $120,000. These lender fees are typically taken out of the initial loan and don’t come out of a borrower’s pockets.
Finally, borrower’s should expect to cover all costs associated with purchasing the property, such as 2% – 5% in closing costs plus any required appraisals. These appraisals are used by private lenders as the basis for their loan amount and typically assess a property’s “as-is” value as well as its ARV. Many hard money lenders have their own appraiser on staff, although some require the borrower to pay for a third-party appraisal.
5. Private Lender Loan Term and Approval Time
Private money loans can have terms anywhere from 1 month to 3 years or more. However, when a borrower works with private lenders such as hard money lenders, loan terms are between 1 – 3 years. Most hard money lenders try to keep their loans to a 1-year term.
Hard money lenders also might have prepayment penalties, which force a borrower to make all of the agreed monthly interest payments.
The approval and funding times of a private money loan are typically as follows:
- Prequalification: As little as 3 minutes
- Funding: As quick as 10 – 15 days
This allows investors to compete with all-cash borrowers and close on a house quickly.
How Do You Apply for Private Money Loans?
Reputable private lenders can typically be found online. There are many different national hard money lenders, for example, and some of the most reputable include:
What to Look for in a Private Lender
It’s important that when you’re looking for a private lender, you assess your options based on very specific criteria. Private money borrowers should look at the following when choosing a private lender and a private money loan:
Private Lender Experience
Private money lenders, like hard money lenders, usually state their years in business and the number of loans they’ve issued. You’ll typically want to work with a lender who’s done more than 100 deals, and you can find this information directly on a lender’s website. Some hard money lenders, such as LendingHome, also state their available capital, which is a good indicator of experience. LendingHome has over $1 billion in available capital.
Real Estate Specialization
Private lenders often specialize in a specific area of real estate. LendingHome, for example, only issues residential hard money loans, while other lenders such as RealtyShares and Patch of Land, offer loans on both residential and commercial properties. Make sure that you’re working with a hard money lender who specializes in the type of property you’re looking to finance.
Interest Rates and Costs
The interest rates and costs of a private money loan vary widely and are largely dependent on the specific lender. Remember that typical interest rates are between 7% – 12% and the typical lender fees are between 1.5% – 10%. However, you can find hard money lenders, such as LendingHome, with a maximum fee of 2.5%. It’s always best to see what the lowest available interest rates and fees are for a private loan.
Remember that some private lenders also have penalties for prepayment. The penalty is often based on a percentage of the loan balance upon early repayment. Other lenders require that borrowers pay off all agreed interest payments as a penalty for prepayment. It’s important to work with a lender that doesn’t have a prepayment penalty, giving you the borrower more repayment options.
Regardless of which private lender you choose, all of them usually have similar loan application processes. We talk about the general application process for a private loan in the section below.
Private Lender Loan Application Process
These hard money lenders typically divide their the loan application processes into two parts:
- Pre-qualification – This phase takes as little as 3 minutes. It’s a quick approval process that gives a borrower a general understanding of their private money loan options.
- Funding – This phase takes between 10 – 15 days to complete. It’s a longer process whereby private lenders gather more in-depth borrower information to finalize a private loan’s costs, rates, and terms.
Let’s take a look at each of these phases in greater detail:
Private money lenders typically use pre-qualification to give borrowers a general idea of their potential loan options. LendingHome, for example, uses this stage to help private money borrowers compile their loan options, compare different offers, and assess their financing choices.
After seeing the potential loan size, costs, fees, and terms, borrowers use the information to set a maximum budget and move forward with the initial purchase agreement of an investment property.
Specifically, private money borrowers will typically need to provide the following during the pre-qualification phase:
- 2-3 months of personal bank statements.
- 550+ personal credit score (you can check your credit score for free here).
- Answers to basic questions, which include things such as the desired property address, expected offer amount, and more.
Based on the borrower information, private lenders such as hard money lenders give borrowers a list of private money loan options. This gives investors the chance to negotiate a sales price and begin closing on a real estate deal.
For more information on pre-qualification, check out our article on rehab loans.
Private money loans are approved and funds are issued during the funding phase. This phase requires borrowers to give their private lender additional and more specific information in order for the lender to make a final decision. Often times, this phase is used to assess a borrower’s experience as a real estate investor as well as their choice of a rehab contractor, if any.
During this phase, lenders typically look for more in-depth documentation, such as:
- Purchase Contract – This contract outlines the specifics of the purchase agreement between buyer and seller.
- List of Past Projects – Private money lenders will require a list of past rehab projects for any type of renovation project.
- Contractor Bids – Private money lenders require that inexperienced rehabbers work with a contractor and want to see contractor bids as part of the application.
- Scope of Rehab Work – For rehab projects, private money lenders require a scope of rehab work.
- Appraisals – Some private money lenders require borrowers to pay for a third-party appraisal, while other lenders conduct their own appraisals.
- Fees and Upfront Costs – Borrowers are expected to cover any upfront fees and costs and are taken out of the initial loan amount.
For more information on the funding phase, check out our article on rehab loans.
Private lenders are non-institutional banks that issue private money loans secured by real estate assets. Private lenders are often referred to as hard money lenders, and private money loans are used to finance the purchase and renovations of investment properties.
Private money loans are offered as traditional hard money loans and hard money rehab loans. Traditional hard money loans are used to finance a property in good condition while a rehab loan is used to purchase and renovate a property in poor condition. For more information on hard money loans, check out our articles on hard money loans and rehab loans and our hard money lender directory.
Remember, you can prequalify online for a 12-month mortgage from LendingHome in just a few minutes. If you’re ready to take the leap on an investment property, visit them today and get your funds in as little as 15 days.