Private Mortgage Lenders: When Banks Say No

Private mortgage lenders are individuals or companies that lend their own money rather than following traditional bank guidelines. They offer financing when banks say no—for credit issues, self-employment, unusual properties or fast closings. Expect interest rates of 8-15%, terms of 1-5 years, down payments of 20-35% and higher fees. Private lending is expensive but can be a bridge to better financing or a solution for unique situations.

What Are Private Mortgage Lenders?

Types of Private Lenders

Individual investors:

High-net-worth individuals
Invest personal funds
May be found through networks

Private lending companies:

Pool investor money
Professional operations
More standardized terms

Hard money lenders:

Asset-based lending
Focus on property value
Short-term, high-rate loans

Family and friends:

Personal relationship lending
May offer better terms
Requires proper documentation

How They Differ From Banks

Factor	Banks	Private Lenders
Funding source	Deposits, secondary market	Own capital, investors
Guidelines	Strict (Fannie/Freddie)	Flexible
Approval speed	30-45 days	1-2 weeks
Interest rates	6-8%	8-15%+
Terms	15-30 years	1-5 years
Credit focus	Primary factor	Secondary to collateral

When to Consider Private Lending

Situations Where Private Lenders Help

Credit challenges:

Recent bankruptcy or foreclosure
Low credit score
Collections or judgments
Waiting period not complete

Income documentation issues:

Self-employed with write-offs
Cash income
New business
Irregular income

Property issues:

Non-standard property types
Properties needing major repairs
Land loans
Mixed-use or commercial

Speed requirements:

Auction purchases
Foreclosure avoidance
Investment opportunities
Quick closings needed

Bridge situations:

Between selling and buying
Temporary financing need
Refinancing into traditional loan planned

When to Avoid Private Lending

If you can qualify for traditional: The cost difference is significant—always try conventional first

Long-term financing: Private loan terms are short; you’ll need to refinance or sell

Tight cash flow: Higher payments may strain your budget

No exit strategy: Must have a plan to pay off or refinance

Private Loan Terms

Interest Rates

Loan Type	Typical Rate Range
Bank mortgage	6-8%
Private residential	8-12%
Hard money	10-15%+
Bridge loans	9-14%

Loan Terms

Duration:

6 months to 5 years typical
Balloon payment at end
Must refinance or pay off

Amortization:

Interest-only common
Short amortization (15-25 years) with balloon
Full amortization rare

Down Payment / Equity

Loan Type	Typical LTV	Your Equity
Conventional	95-97%	3-5%
Private residential	65-80%	20-35%
Hard money	60-70%	30-40%

Fees and Points

Origination points:

2-5 points typical (2-5% of loan)
Higher than conventional (0-1%)

Other fees:

Processing fees
Underwriting fees
Legal fees
Appraisal fees

Example costs on $300,000 loan:

3 points: $9,000
Fees: $3,000
Total upfront: $12,000

The Private Lending Process

Step 1: Find Lenders

Sources:

Mortgage brokers (some specialize)
Real estate investors
Online private lender directories
Referrals from attorneys, accountants
Real estate networking groups

Step 2: Initial Discussion

Provide:

Property information
Loan amount needed
Your situation/story
Exit strategy

Lender evaluates:

Property value and condition
Your experience and plan
Risk factors
Whether it fits their criteria

Step 3: Application and Terms

Submit:

Application
Property documentation
Financial information (varies)
Purchase contract (if applicable)

Receive:

Term sheet or commitment letter
Interest rate and fees
Conditions

Step 4: Due Diligence

Lender conducts:

Appraisal or valuation
Title search
Property inspection (sometimes)
Background check

Step 5: Closing

Faster than conventional:

1-3 weeks typical
May be same-day for some lenders
Attorney or title company closes

Hard Money Loans Specifically

What They Are

Hard money loans are asset-based:

Primary focus: Property value
Secondary: Borrower qualifications
Short-term (6-24 months)
High rates (10-15%+)

Common Uses

Fix and flip:

Buy distressed property
Renovate quickly
Sell for profit
Repay loan

Bridge financing:

Short-term need
Refinance into permanent loan
Sell property

Auction purchases:

Need cash-equivalent speed
Close within days
Refinance after

Hard Money Math

Example fix and flip:

Purchase: $200,000
Renovation: $50,000
Hard money loan: $200,000 at 12%, 3 points
6-month hold

Costs:

Interest: $12,000 (6 months)
Points: $6,000
Closing: $3,000
Total loan cost: $21,000

For this to work: After-repair value must be $300,000+ to profit

Risks of Private Lending

For Borrowers

High costs:

Rates 2-3x conventional
High fees eat into equity
Expensive if you can’t exit

Short terms:

Must refinance or sell
Rate/market risk at refinance
Balloon payment pressure

Predatory lenders:

Some take advantage
Hidden fees
Aggressive foreclosure
Vet lenders carefully

Protecting Yourself

Before signing:

Read all documents carefully
Understand all fees
Know your exit strategy
Have attorney review

Red flags:

Pressure to sign quickly
Fees not clearly disclosed
Terms that seem too good
No written documentation

Exit Strategies

Essential Planning

Before taking a private loan, know how you’ll exit:

Refinance to conventional:

Improve credit during loan term
Build equity through property appreciation
Document income properly
Apply 6 months before balloon due

Sell the property:

Flip after renovation
Sell when market improves
Downsize to smaller property

Pay off from other sources:

Business profits
Sale of other assets
Inheritance or windfall

If You Can’t Exit

Options:

Extend with current lender (negotiate)
Refinance with another private lender
Sell property (even at loss)
Negotiate short sale if underwater

Prevention:

Conservative timelines
Multiple exit plans
Reserve funds for delays

Finding Legitimate Private Lenders

Where to Search

Professional networks:

Real estate investment groups
Attorney referrals
CPA referrals
Mortgage broker connections

Online resources:

Private lender directories
Real estate investor forums
LinkedIn connections

Local sources:

Community banks (sometimes flex)
Credit unions
Local investors

Vetting Lenders

Check:

Years in business
References from past borrowers
Online reviews and reputation
Licensing (where required)
Physical office location

Ask:

How many loans have you funded?
Can I speak with past borrowers?
What happens if I can’t pay off on time?
Are there prepayment penalties?

Private Loans vs Other Alternatives

Comparison

Option	Rate	Speed	Qualification
Conventional	6-8%	30-45 days	Strict
FHA	6-7.5%	30-45 days	Moderate
Private	8-15%	1-2 weeks	Flexible
Hard money	10-15%+	Days	Asset-based
Seller financing	5-10%	Flexible	Negotiated

When Each Makes Sense

Conventional: Whenever you qualify

FHA: Lower credit or down payment needs

Private: Can’t qualify traditionally, short-term need

Hard money: Investment deals, speed critical

Seller financing: Motivated seller, flexible terms

Frequently Asked Questions

Are private mortgage lenders legitimate?

Many are legitimate businesses serving real market needs. However, the industry has less regulation than banks, so vetting is essential. Check references, reviews and licensing.

Why are private lender rates so high?

They take on higher risk (credit issues, unusual properties, less regulation) and have higher cost of capital. They’re also providing a service banks won’t—that has value.

Can I refinance out of a private loan?

Yes, that’s often the plan. Spend the loan term improving your credit, documenting income and building equity, then refinance to conventional financing.

How fast can private lenders close?

Some can close in days if paperwork is ready. Typical is 1-2 weeks. Much faster than the 30-45 days for conventional loans.

Do private lenders check credit?

Usually yes, but it’s not the primary factor. They focus more on property value, equity and your exit plan than credit score alone.

What happens if I default on a private loan?

The lender can foreclose, often faster than banks due to fewer regulatory requirements. Private lenders may be less likely to offer workout options. Understand this risk before borrowing.

Is a private loan the same as hard money?

Hard money is a type of private loan, but not all private loans are hard money. Hard money specifically refers to short-term, asset-based loans at high rates. Private loans can also include longer-term residential financing from non-bank sources.