A Private Lender, sometimes referred to as a Hard Money Lender, is any individual or business that makes loans secured by real estate, typically charging higher rates than banks but also making loans that banks would not make, funding more quickly than banks and/or requiring less documentation than banks.

Private Lenders exist because many real estate investors need a quick response / funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency in their decision-making process, along with quick access to capital.

Typical borrowers are often asset-rich and cash-light and may have a credit issue that prevents them from obtaining a loan from their local bank or credit union. On acquisitions, borrowers usually make a large down payment and, on refinances, our borrowers usually have quite a large amount of equity built up in the asset.

Private Loans can have a number of advantages over traditional bank financing including: (i) Less scrutiny of the borrower’s personal financial situation, including income and historical tax returns, compared to bank loans, (ii) Borrowers can allocate less time to seeking financing and instead concentrate on other business, (iii) Most private lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific deal under consideration, and (iv) Self-employment is acceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.

Disadvantages of seeking a private money loan may include: (i) The quality of private money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on the underlying real estate as a business strategy (ii) Some lenders may approve a loan without having the capital required to make the loan; they may either hope to find the capital once the funding date approaches or they may simply ghost the client at the closing table.

A borrower might consider using a private or hard money lender in situations where he or she is willing to pay a higher interest rate and/or higher up-front fees in the interest of gaining access to capital more quickly, dealing with less bureaucracy and more transparency during the application process, and finding capital to pursue an opportunity that banks will not finance, either because they are unwilling or unable to do so.

Private Lenders compete on fees, interest rates, their reputation, and quality of service, which includes the ability to fund a deal quickly and being more accessible to the borrower during the term of the loan and/or flexibility in case of unforeseen events and how the lender responds to special borrower requests.

Private Lenders will lend on both commercial and residential properties, although many will not lend on owner-occupied residences due to higher thresholds of scrutiny required by law. Commercial properties can include industrial, shopping centers, and office buildings. Some, but not all, lenders will also invest in raw land slated for development and even hotels. Vacation homes (single family residences), even if not a primary residence, are considered “owner occupied” and may or may not be financeable depending on the lender’s criteria regarding owner-occupied home loans.