Posted over 3 years ago

Banks vs. Private Lenders

The mortgage world is a confusing one that is, - understood by few but, needed by all. Therefore, you’ll eventually be in need of one when you decide to make your first real estate purchase. Whether you choose to purchase a home, investment property, or commercial property for your business, you will likely apply for funding. So what’s next? Where do you go for funding and guidance for this major expenditure? A bank? A private lender?

Which one will provide the most direct benefit to you?

To make the best decision, you should weigh your options. Everyone’s financial needs are different, therefore comparing the pros and cons of each to determine the best fit for you financially. Mortgage loans from the bank, or a traditional lender, are currently the most popular and widely sought after funding option. Unfortunately, bank loans are not without their downfalls, and some people and businesses may qualify for a mortgage from the bank. Luckily, they have options. Private money lenders step in when mortgage loan applications from the bank are declined.

Since the 40’s, the “American Dream” has consisted of owning a home. Most people could not make this dream a reality without applying for a mortgage. That’s when banks began issuing mortgages more frequently, this was a way for banks to offer middle class citizens a helping hand in achieving this idolized way of life. Since then, the mortgage market and the banks have evolved with the ever-changing conditions of the real estate market. Due to the depression of the 1930’s and multiple recessions, the stability and ability to lend by banks has been a rollercoaster ride. Today, receiving a bank loan is a tedious, time consuming process. American debt is soaring, so the terms and lending stipulations of banks keep getting stricter.

The application process of a bank loan could ultimately be described as never-ending. They prefer an almost perfect credit score, a clean financial history, explanation of all incoming and outgoing funds, personal finances and bank statements, W2 or 1099 forms, tax records, profit and loss statements, paycheck stubs, mortgage payment records, a list of assets like real estate and car titles, mutual funds, proof the loan isn’t a gift, a complete list of your debts, such as credit cards, student loans, car loans and child support payments. Obtaining copies of these documents takes time, releases personal secure data and can be a real hassle to provide. Foreclosure, bankruptcy, or less than perfect credit can automatically result in denial for a loan application.

Private lenders are often an ideal alternative financing option. The paperwork is minimal and hassle-free; receiving an approval is much easier to obtain. Private money is asset-based. The approval comes from the value in the asset, and never the borrower’s credit score of financial history. In private money, the asset or collateral is the borrower’s property or business. For bank loans, collateral is unfortunately the borrower’s personal vehicle or home. Banks are under government restrictions when it comes to approvals and private money lenders are not.

Both banks and private lenders will require some form of upfront payments or commitment fees, but many banks demand upfront application fees even before an approval. Terms and rates vary significantly for each as well. Banks usually offer lower interest and a fixed rates to be repaid over set years IF you can get an approval. Fluctuating, (adjustable) terms could mean that payments become more expensive over time. Private money lenders tend to have higher interest rates on their bridge loans, but loan to a range of credit scores and offer a short-term repayment schedule. Terms are also able to be made more flexible when it comes to bridge loans and do not fluctuate. In contrast, banks have strict guidelines and standards they must follow when it comes to stipulations for lending money. When a hard money lender issues an approval, the approval stands. That is the benefit to choosing the direct funding lender. You can count on them to close the deal. There is no hidden middle man to dodge, or multiple levels to clear. All funds are raised and controlled by the lender, decisions are made in-house. Private money lenders can often offer same-day approvals, and after minimal paperwork can process and close your loan quickly. Banks on the other hand have been known to leave borrowers waiting for their money for months at a time.

Comments (2)

  1. I'm new to private money loans. I've done a few conventional loans and never had to put up additional collateral. How is the collateral structured in private money? For example, if I borrow $50K from a private lender, and my current assets are worth $2M (not counting the property I am looking to purchase), how would my collateral (or portion of) be seized in the event of a breach of loan? Thank you!

  2. Private lending consists of hard/soft lenders, etc.?