What is a private lender and how are they different from traditional lenders? How do you find a good one, and what are the benefits? Plus many more FAQs.

The options for financing real estate investments can be confusing for new investors. Conventional financing may be available from banks or mortgage lenders, but private lending is an option that all investors should consider.

Private lenders can provide funding for almost any type of real estate purchase. Individuals buying a personal primary residence can get financing through a private lender. In this guide, however, we're addressing what private lenders do for real estate investors.

What is a private lender?

A private lender is an individual or business that loans money but is not an “institutional lender.” Private lenders can range from friends or family members who loan money for real estate investments to companies that issue student loans as their main business activity. We will focus on businesses that provide private money loans for real estate.

Examples of 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. In the context of real estate, this can mean putting more focus on the property than the borrower.

What private lenders don’t provide

Private lenders may provide funding for real estate transactions. However, they differ from traditional mortgage lenders. For example:

Private lenders do not provide conventional mortgages backed by Fannie Mae or Freddie Mac
Private lenders do not provide mortgages guaranteed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), or any other government agency.
Private lenders do not accept deposits (like a bank account would), manage or create retirement accounts, or offer certificates of deposits (CDs)

The property will secure the loan, similar to how a home serves as security for a residential mortgage. The borrower signs a promissory note, which is also much like a mortgage note. If the borrower fails to make payments on the loan, the private lender can foreclose on the property.

What are the benefits of using a private lender?

Private lenders offer a number of benefits over conventional financing, including:

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, when deciding whether to issue a loan for the purchase of that property.

Hard money lenders tend to look primarily at ARV when evaluating a loan application. Other 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. Private loans can help investors:

Purchase residential property (for a fix-and-flip project, for example)
Execute ground-up construction projects
Purchase commercial property (office buildings, multi-use, large multifamily complexes, gas stations, etc.)

What is a direct private lender?

Some private lenders make loans with funds obtained from third parties, who are often investors. 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?

Finding the right lender for your needs involves some research. Here are some tips for how to find a great private lender and exercise due diligence.

Where do I look for private mortgage lenders?

Borrowing money from a private lender is not like walking into a bank and asking for a loan application. Private lenders can take time, but it is worth it if you are able to find someone who can provide you with the kind of financing you need.

Once you understand how private lending works, perhaps with the help of this article, you can use resources like the following to find a 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: Rather than approaching lenders about your project, you can try marketing your project so that interested private lenders approach you instead. 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. You could even try more traditional marketing methods like mailers or newspaper ads.

Do you need a license to be a private lender?

Neither Texas nor the federal government require licenses for private lenders, with some exceptions. The Texas Office of the Consumer Credit Commissioner (OCCC) requires any lender that issues “consumer loans” with interest higher than 10% to obtain a license as a “regulated lender.”

A hard money lender or other private lender that specifically works with real estate investors might have a background in real estate and a license from the Texas Real Estate Commission (TREC). This is not, however, a requirement for private money loans.

Even without a specific license requirement, private lenders may be bound by other laws. For example, all lenders must follow Texas laws regarding usury, which currently cap interest at 10% unless otherwise allowed by law.

Due-diligence questions to ask private lenders

Questions that you can ask private money lenders while you’re doing due diligence may include the following:

Do you charge a loan application fee?
Do you have references and testimonials from past borrowers?

Which types of projects do you fund?
Are you licensed by TREC, OCCC, or another government agency? If so, what is your license number?
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?
What are your terms regarding interest rates and LTV?
How much do you require down?
How does the size of my down payment affect my interest rate?
What factors do you consider when evaluating a loan application? Examples include ARV, income, credit score, DTI, etc.
Do you charge an origination fee?
Do you charge points? If so, how many?
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?

How to select the right private lender for your project

When you’re selecting a private lender loan for real estate, major factors include:

Experience with the type of project you are planning
Experience in and knowledge of the area where the property is located
A track record of satisfied borrowers and successful investment projects
A clear mission regarding the types of projects they will fund

Private lending FAQs

#1: What happens to a private mortgage when the lender dies?

Suppose you borrow money from a friend or family member to fund your real estate investment. Before you have finished paying off that debt, the lender dies. The debt, however, stays where it is. You will still be responsible for paying that money back to their estate. The administrator or executor of the estate will take over receiving your payments.

If you borrowed money from a business, the closest equivalent would be bankruptcy. Again, the debt remains in force. The money you owe to the private lender is probably on their balance sheet as an asset. The bankruptcy court will appoint a trustee to manage all outstanding accounts.

#2: How do I approach a private money lender?

You should be prepared with specific information about yourself and your project. The more documentation you can provide, the better. The lender will want specific information from you to determine if you're a good fit. This might include the following:

Information about the property, such as location, current condition, and current value
Your plan for the investment, which can help the lender perform their own calculations to determine the property’s ARV
Your experience as a real estate investor, including past successful investments
Your financial information, such as credit score and DTI — although many hard money lenders will not rely on this information when making a decision

#3: Do banks offer private loans?

No. By definition, banks are not private lenders. They are institutional lenders regulated by the fed government and many state governments. Private lenders, by definition, are not subject to the same regulations.

#4: What is the difference between a personal loan and a private loan?

The term “personal loan” usually refers to a loan that you take out as an individual for use on something personal. In that sense, it is different from a business loan, which you would use for business purposes, or a residential mortgage, which you would use to buy a home. All of these loans would come from a conventional lender, such as a bank.

A private loan comes from a lender that is not subject to institutional lenders’ regulations. It is possible to take out a private loan for personal use. It is more common, at least for companies that make private loans, to lend money for investment or other business purposes.

#5: Why are private loan rates higher?

One of the benefits of private lending is that the lack of regulation allows for greater speed and flexibility. The flip side is that the parties to a loan agreement take bigger risks. Private lenders lack the built-in protections that come with government regulation. Higher interest rates are a way to make up for that risk.

#6: Can I refinance with a private lender?

You can refinance a property with a private loan. Not all private lenders do refinances, though, so be sure to ask.

#7: How does a private lender make money?

Private lenders make money that same way institutional lenders do — by charging interest. When you pay interest to borrow, you are essentially paying a fee for the use of their money, sort of like paying to rent a car or, in years past, a DVD.

When performing due diligence on a potential private lender, watch out for hidden fees. A common form of lending fraud is to charge extra fees that were not clearly disclosed, but were instead hidden in the fine print. Many private lenders charge no upfront fees and do not make any money until the borrower starts repaying the loan.

#8: Are there safety regulations to protect me as a borrower?

Usury laws prevent lenders from charging excessive interest. Beyond that, most laws that protect consumers from predatory lending practices do not apply to private lenders. Borrowers may have to rely on their own due diligence in reviewing contracts and other paperwork. Contract law might be able to help if the lender attempts to do something that their agreement does not allow.

Team up with a trusted private hard money lender!

The hard money lenders at Capstone Capital Partners are here to help. We offer fast and flexible financing for real estate investment projects throughout Texas and California. Capstone’s team, including fellow investors and an integrated in-house servicing team, is prepared with droves of experience in both residential and commercial deals. We’ll assess your project and have you funded quickly.

Applying is easy: answer a few quick questions about yourself and your project!

Start Your Pre-Approval

A Private Lending FAQ Guide for Real Estate Investors