When it comes to obtaining a loan for a real estate venture, there are two forms of funding available: traditional banks and private money lenders. Both are great options, depending on the deal and what you are specifically looking for, however, it is important to understand the differences of each in a side-by-side comparison.
Interest Rates and Origination Fees
Generally, banks will have lower interest rates and origination fees than that of private lenders. They set their rates based on other bank’s comparative rates for similar loans. Private lenders tend to have higher interest rates than those of banks. They offer a completely different set of qualifying criteria and unique features, and thus require a higher rate.
Loan to Value
Banks will usually lend between 80-100% of loan to value (LTV) on a property, depending on the type of loan and property. Private lenders will usually lend up to 90% LTV. The most significant difference is that banks will usually base their value on the current value of the property, where private lenders will typically base it on the expected value once repairs have been completed on a fixer upper property.
A bank will usually take anywhere from 30 -90 days to close the funding on a loan, depending on the specific loan details. Because private lenders criteria are so distinctly different from that of a bank, private lenders can usually close in as early as a few days to a few weeks. The process is also more open with private lenders as there are fewer people involved in approving a loan.
Loans with a bank are usually designed for a longer term. They can be set anywhere from 5 to 15 to 30- year notes. Loans through a private lender are typically very short term. They are typically 6 months to 1 year in length.
Type of Deal
Banks like to lend on simple, safe deals. They have multiple sources of income such as interest on loans and lines of credit, interest and fees on credit cards, certificates of deposit (CDs), student lending, and auto loans. They will pass on deals that do not appear to be safe and secure. Private lenders make their money on deals that make sense and have assets to back them up. They are more willing to loan on deals if they feel that they and the borrower can both make money on it.
Both are great options depending on what your needs are.
-If you’re looking for a straight forward mortgage on a property you intend to keep for years down the road, a traditional bank mortgage loan is the way to go.
-If you are looking for a short term, quickly funded, fix and flip, or challenging property, private lending is the way to go.
Meyer, Ken (April 30, 2013) Real Estate Showdown: Private Lenders vs Bank Lenders [Blog] Retrieved from