Private Lending: Getting Started

What is a private lender?

A Private Lender could be any individual or a small business that loans money. Private lenders can range from friends or family members who loan money for real estate investments to companies that issue student loans.

Institutional Lenders include banks, credit unions, and government-backed mortgage lenders. They are subject to regulation by federal and state agencies. Private lenders are not subject to those regulations.

Institutional lenders must follow guidelines set by regulators when evaluating loan applications. Private money lenders have more flexibility to decide what criteria to consider. They may be able to loan money in situations where institutional lenders cannot. Often private loans for real estate mean putting more focus on the property than the borrower.

Differences between private lenders and traditional lenders?

- Private lenders do not offer conventional mortgages that Fannie Mae or Freddie Mac back.
- Private lenders do not offer mortgages that the government guarantees, such as FHA, VA, or USDA loans.
- For real estate, the property secures the loan. The borrower signs a promissory note, similar to a mortgage note. The private lender can foreclose on the property if the borrower does not pay the loan.

What are the benefits of using a private lender?

- Wider access to financing: Since private lenders have fewer regulatory requirements, they may be able to lend money to borrowers who would not qualify with a conventional lender. For example, hard money lenders (a type of private lender) often look at a property’s ARV more than a borrower’s credit history.

- Quick approval: The review and approval process tends to be much faster with private lenders.

- Flexibility: Private lenders are often able to tailor loans to investors’ specific needs.

What do private lenders consider when evaluating loans for real estate investments?

Many private lenders, including hard money lenders, place greater focus on the value of the property than the creditworthiness of the borrower. They might look at a property’s after-repair value (ARV), meaning the projected market value of the property once repairs and renovations are complete.

Private lenders might also look at factors like the borrower’s credit history, credit score, and debt-to-income ratio (DTI). All private lenders will consider the loan-to-value ratio (LTV).

What can I do with a private money loan?

Investors can use private money loans for a wide range of projects and activities:

- Purchase residential property

- Execute ground-up construction projects

- Purchase commercial property (retail, office and mixed-use buildings, large multifamily complexes, gas stations, etc.)

What is a direct private lender?

Some private lenders make loans with funds obtained from third parties. A direct private lender is a private lender that makes loans out of their own funds, rather than acting as an intermediary.

How do I find a private lender?

- Online research: You can search the internet for private lenders in your area, or lenders who offer loans for the kind of project you have in mind. You can also search to see what others are saying about those lenders.

- Networking: Word-of-mouth is probably the world’s oldest method of business promotion. If you know other real estate investors, ask them about private lenders. People at real estate seminars may be able to point you in the right direction.

- Bring lenders to you: You can try marketing your project so that interested private lenders approach you. Social media sites like Facebook or LinkedIn might have groups for real estate investors in your area, and private lenders might frequent those groups as well. 

Due-diligence questions to ask private lenders

Which types of projects do you typically fund?

What are your minimum and maximum loan amounts?

What are your minimum and maximum loan terms (lengths)?

How do you handle disbursement of funds for renovation and construction loans?

How much do you require down?

Do you charge an origination fee?

Can I buy down my interest rate with points?

What penalties do you charge for late payments?

Do you charge a prepayment penalty?

Do you require borrowers to maintain cash reserves in a certain amount?