Mortgage from Private Lender or Regular Bank?

Question

I am seeking a loan, and I have a few options between a private lender and a regular bank. The terms are similar. What are the pros and cons of each?

Will the private loan show up on my credit?

And lastly, what are the general rules of thumb or red flags that I should look out for when working with a new lender so that I don't get screwed?

Stephen Lovett · Answer

@Jerry Poon so my definition of a private lender is different from @Antonio Gonzales.  What he's talking about is what I would refer to as a hard money lender.  Private  lenders, are non-professional lenders ( your uncle, colleague, uncle money bags down the street)   They're just ordinary  people who want in on the real estate action but don't have the time to find and manage deals.

Antonio Gonzales · Answer

@Jerry Poon, Joshua Nudell had some great info. @Karen Margrave thank for the mention. I am a private lender based here in San Diego. We do not generally report to credit bureaus. There have been occasions where a borrower has a great history with one of our loans and they initiate a credit bureau to contact us to verify and provide a mortgage history that credit bureau will add to borrower's account that will be included in scoring.

The loan and payments should be included in your loan application when qualifying for other loans including traditional conventional loans.

Traditional Bank Pros:

• Lower Rates
• Generally Lower Fees
• Longer Terms of Loan, i.e., 15-30-40 years
• Several federal and state authorities regulate banks along with the Federal Reserve. These include: The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) and the banking departments of various states also regulate financial institutions.

Traditional Bank Cons:

• Possibly Lengthy Application Process
• Strict Underwriting Guidelines including financial documents to support debt to income ratios
• Longer Underwriting Times that can go between 45-60+ days depending on property.

Private Lender Pros:

• Fast & Easy Application Process due to being asset-based lender.
• Credit Score less of a factor as the weight is based on ability to make payments and not debt-to-income ratios.
• Generally quick funding turnaround between 5-10 business days. 
• More flexibility to customize loan to accommodate needs of borrower. This includes being able to lend to a borrower that may not have the best credit or a recent Foreclosure, Short Sale, BK, that would otherwise be declined from traditional bank.

Private Lender Cons:

• Higher Rates
• Generally Higher Fees
• Shorter terms that range from 6 months to 5 years
• Less regulated, so be sure to do your due diligence on the history of the private lender.

I tried to be as concise as possible, and I know there are more pros and cons to both routes, but I tried to at least highlight the main points.

Feel free to reach out with any other questions. Best wishes!

Stephen Lovett · Answer

@Jerry Poon I would go with the private lender as well for all of the reasons mentioned above.  Just make sure that you have all the correct paperwork in order (Agreement, Promissory Note, Mortgage & Memo of Mortgage).  In my case, I provide my documents to the lender (private lenders are non-professional lenders so they will not have this set up). You may need to invest in some attorney time to make this happen.  If your lender already has these forms and a process in place, keep in mind that you might be talking with more of a hard-money lender than a private lender.

Joshua Nudell · Answer

@Jerry Poon,

It should count towards DTI, but if it's not reported, it's up to you to let any financial institution your work with in the future know about that loan.  They will discover any mortgage against the same property you're using as collateral when they do a title search.  Additionally, all banks make you sign documentation that you attest to the fullest of your knowledge that you have disclosed all of your assets/liabilities.  If they find out about the loan, there could be complications for you because you didn't disclose the private loan.

Also, with the private loan, make sure you're not paying anything directly to the lender in order to secure the loan.  Those types of deals are usually a scam and you should be careful.  Any funds requested should be handled by a lawyer through escrow until closing.

If it's legitimate, I would go with the private lender as well.

Not legal advice.  You should always consult a lawyer when dealing with private transactions.

Michael Hicks · Answer

If the terms are similar, I would go with the private lender as it would not hit my credit.  That would leave your bank option open for future use if private funds were not available.  Good luck, Mike

Neil Aggarwal · Answer

Private lenders are typically not set up to report to credit agencies.

Karen Margrave · Answer

Maybe @Antonio Gonzales would like to field this question. He's in your area.

Jerry Poon · Answer

Thank you so much! Your reply was super informative.

Jerry Poon · Answer

Thanks for the input. This might be a stupid question, but how do I exactly tell between a private lender or a regular bank?

Michael Hicks · Answer

I agree with @Joshua Nudell

Mortgage from Private Lender or Regular Bank?

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