Private money mortgage loans have become an increasingly popular option for borrowers who may not qualify for traditional bank financing As a real estate investor and blogger, I want to provide a comprehensive guide explaining what private money loans are, who offers them, their pros and cons, and things to consider before getting one
What Are Private Money Mortgage Loans?
Private money mortgage loans are non-traditional home loans offered by private lenders, not banks or mortgage companies. The lenders are often individuals companies or groups who have pooled funds to lend.
Some key characteristics:
- Offered by private lenders, not banks
- Lender sets own criteria, not conforming to standards of Fannie Mae, Freddie Mac, FHA, etc.
- Often used by real estate investors and flippers
- Higher interest rates and fees than traditional mortgages
- Shorter loan terms, like 1-3 years
- Lending based more on collateral than borrower’s finances
Unlike regulated lenders, private lenders can set their own criteria for approving borrowers. This provides more flexibility but less oversight.
Who Offers Private Money Loans?
There are a few main sources for private money mortgage loans
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Individual investors – Wealthy individuals may offer private loans if they have excess cash to invest and want higher returns. Often arranged through personal connections.
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Mortgage companies – Some non-bank lenders specialize in private money loans. They have funds from individual investors or groups.
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Real estate investment groups – Many local real estate investment clubs and hard money lending groups offer private loans. Members pool funds.
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Friends and family – Borrowing from people you know allows more flexible terms but can damage relationships if not repaid.
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Websites – Online lending marketplaces like LendingHome allow investors to fund loans to borrowers.
Pros and Cons of Private Money Loans
Compared to regular mortgages, private money loans have some advantages but also drawbacks to consider:
Pros
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Easier to qualify – Better option for borrowers with poor credit or who don’t meet bank standards
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Fast process – Can be funded quicker than traditional mortgages
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Flexible requirements – Lender may require less documentation and lower credit scores
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Useful for real estate investors – Good for flippers or rental properties banks may not finance
Cons
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Higher costs – Interest rates typically 8-15%, origination fees 1-5% of loan amount
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Shorter terms – Often 1-3 years so must refinance into another loan
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Variable rates – Interest may fluctuate instead of fixed rate
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Fewer protections – Not regulated like banks, less recourse if problems occur
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Risk damaging relationships – Borrowing from friends/family can harm ties if not repaid
What Do Lenders Look For?
While bank lenders focus on your income, credit score and debt-to-income ratio, private lenders emphasize the property’s value and your equity in it.
Key factors private lenders may evaluate:
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Loan-to-value ratio – Want sufficient equity, at least 20-30% typically
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Property appraisal – Confirm fair market value to secure their investment
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Experience with real estate – More comfortable lending to experienced investors
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Exit strategy – How you’ll pay off the loan, like selling or refinancing
Bringing significant equity or other collateral to the table makes approval more likely. Having a solid business plan helps too.
Tips for Getting a Private Money Loan
If you need flexible financing, here are some tips:
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Shop around – Compare offers from multiple potential lenders
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Negotiate – Seek the best possible terms like lower fees or interest rates
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Get experienced help – Work with a real estate attorney to review agreements
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Understand the costs – Ask for detailed estimates of all fees and closing expenses
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Build relationships – Private lenders value working with borrowers they know and trust
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Highlight your expertise – Sell lenders on your real estate investing experience
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Offer collateral – Provide assets or equity beyond the property to secure the loan
Alternatives to Private Money Loans
If you don’t qualify for a traditional mortgage, private financing may not be your only option. Here are a few alternatives worth considering:
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FHA, VA, or USDA loans – Government-backed mortgages have more flexible credit standards
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Renovation loans – FHA 203(k) and other programs finance purchase and repairs
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Home equity loan or line of credit – Use equity in current home for down payment on investment property
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Partner financing – Seller may provide financing if you lack down payment
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Crowdfunding – Websites like LendingHome allow multiple investors to fund your loan
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Wait and improve credit – Build your score before applying so you can qualify for prime financing
The Bottom Line
Private money mortgage loans provide flexible financing from non-bank lenders when you can’t qualify for traditional mortgages. But higher costs and fewer protections mean you should explore all your options before choosing this route. If you have the equity, experience and exit plan private lenders look for, and do your homework to get the best terms, a private loan can be a viable solution for real estate investors.
Top 10 California Private Lenders
According to Forecasa™, here are the Top 10 Private Lenders ranked by the number of private mortgage loans originated in California in the last 12 months from March 2024.
- Kiavi
- Anchor Loans
- Val Chris Investment Inc
- Center Street Lending
- Conventus LLC
- Easy Street Capital
- Provident Trust Group
- Merchants Mortgage and Trust Corporation
- Fundloans Capital
- Genesis Capital
Forecasa™ provides analytics data for California private lending on a quarterly basis. You’ll find their top lenders data for many other states on our platform.
California Private Money Lending Guidelines
California has lots of “private money” and lots of professional private money lending companies that offer short-term loans secured by real estate. It’s mainly for investment properties, but California has some unique laws that enable private lenders to fund loans secured by a borrower’s primary residence. Here are the typical private money lending guidelines for most lenders in California:
- Loan Amounts: $50,000 to $20,000,000
- Interest Rates: 9% to 13%
- Origination Fee: 1 to 3 points
- Maximum LTV for Senior (1st) Lien: Up to 70%
- Maximum CLTV for Junior Liens: Up to 65%
- Lien Position: 1st, 2nd or 3rd
- 2nd mortgages are common in California
- Loan Term: 1 month to 5 years
- Most private money lenders max out at 24 months
- Most lenders have a 3-month minimum term (interest guarantee)
- Payment Type: Interest-only
- Few private lenders in California amortize all of their loans
How You Can Find Private Lenders As a Beginner Real Estate Investor
FAQ
What is a private loan mortgage?
Are private mortgages a good idea?
How do you borrow money privately?
What is a private money lender?
What is a private mortgage lender?
A private mortgage lender is an entity that provides funds for a home loan and earns a profit on the investment by charging interest. Private mortgage lenders can be individuals, such as friends or family members, or businesses.
How does a private money loan work?
As a rule of thumb, a private money lender will use the before and after property value when deciding whether to fund a loan, and to a lesser degree a borrower’s credit score or personal financial situation. The trade off is that fees and interest rates on a private money loan may be higher than with a traditional mortgage.
How do private money lenders make money?
Private money lenders make money the same way that a traditional lender like a bank or credit union does, with fees generated from loan originations and interest payments on the funds borrowed. However, instead of serving as a middleman the way a mortgage broker does, a private lender works directly with a borrower.