Have you ever considered using private money loans? Here is what you need to know!
How Private Money Lenders Work
Private money lenders typically offer loans that are secured by a real estate asset. These loans are used to purchase a house, condo or multifamily building. Private money lenders can be anyone from a personal friend to an established private lending company and are therefore called “relationship-based” lenders.
However, 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 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 who private lenders are specifically right for in the section below.
Still, 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 of private money lenders are as follows:
Primary circle: Family & friends
Secondary circle: Colleagues, professional & personal acquaintances
Third-party circle: Accredited investors & hard money lenders
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.
If you’re looking for a private lender in your state, check our national directory of private lenders.
Who Private Money Lenders are Right For
Private money lenders are predominantly right for short-term fix and flippers who want to compete with the short timeline of an all cash buyer. However, private loan lenders are also right for long-term investors who want to rehab a rental property before refinancing into a permanent mortgage or seasoning a property before refinancing.
Private money lenders are right for the following types of people:
Fix-and-flippers looking to purchase, renovate, and sell a property within 1 year.
Short-term and long-term investors who need financing quickly.
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.
Long-term investors who need to season the property
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 Lender Rates, Terms, & Qualifications
Since private lenders can come in many shapes or forms, the rates, terms, & qualifications of a private money loan vary widely. 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 Loan Rates, Terms & Qualifications
Private Money Lender
Maximum Loan AmountUp to 90% of LTV Up to 80% of ARV
Minimum Down PaymentUp to 10%+ of LTV Up to 20%+ of ARV
Interest Rates7% - 12%
Points (Lender Fees)1.5 - 10 Points
Typical Loan Term1 - 3 Years
Time to ApprovalAs Little as 3 Minutes
Time to Funding10 - 15 Days
Qualifications Needed for Loan ApprovalMin. Credit Score of 550 (check your credit score for free) 2x Personal Bank Statements
Where to Apply
Private Money 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 loan to value (LTV)
80% of a property’s after repair value (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. Purchase hard money loans 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
Private Money Lender Interest Rates, Costs, & Fees
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. Some lenders charge prepayment penalties if the loan is paid off before the due date while most don’t let you pay early and reduce your holding costs.
Private lenders such as hard money lenders typically issue loans with interest rates, costs, and fees that are similar to the following:
Interest rates: 7% – 13%
Lender fees (points): 1.5% – 10%
Closing costs: 2% – 5%
Independent appraisal: $300 – $400
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 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. These fees are also part of the above-mentioned lender fees. 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+
Private Money 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.
Private Money Lender Loan Qualifications
Private money lenders generally have standardized loan qualifications for their private money loans. A national 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
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
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
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.