When you’re considering buying a home or building one from scratch, finding the right loan is of the utmost importance. To get the correct loan, you must first find a lender that’s willing to give you the money you need to make the transaction. You can apply for a loan with either a private money lender or a traditional mortgage lender.

While traditional mortgage lenders usually provide lower interest rates and more security, it’s often easier to obtain a loan from a Private Money Lender. To help you make your decision, let’s consider the things that differentiate these two types of lenders.

What Is a Private Money Loan?

A hard money loan is a type of short-term loan that will require you to provide an asset as collateral. If you expect to use the money to construct or buy a home, the property will serve as collateral. If you default on the loan, the lender can claim ownership of the property. An investor can use this type of loan to help purchase one home while selling another. The main difference between traditional lenders and private ones is that you can’t get a hard money loan from a bank.

Loans Available from Traditional Mortgage Lenders

Traditional traditional mortgage lenders offer standard mortgages that you can use to finance a home. These loans usually aren’t as flexible as the ones provided by private money lenders. The main loan types that you can apply for include the following:

• Fixed-rate mortgage: Ideal for borrowers who want a more predictable monthly payment that rarely changes
• Adjustable-rate mortgage: Suitable for borrowers who would prefer lower interest rates and payments at the start of the term
• Traditional loan: Perfect for borrowers who have high credit scores and want a traditional mortgage loan
• Government-backed loan: Useful for borrowers who have low cash reserves and poor credit
• Jumbo loan: Ideal for borrowers who have great credit and wish to buy an expensive property

Loans Available from Private Money Lenders

If you’re considering a loan from a Private Money Lender, you have more unique options at your disposal that traditional lenders don’t offer. These options include everything from a private money loan to a Ground-Up Loan.

A private money loan allows you to purchase a home as long as you provide the property as collateral. These loans are like traditional mortgages with more lenient terms.

Debt-service coverage ratio (DSCR) loans measure the property’s estimated cash flow to determine if you qualify for them. This loan is perfect for investors who anticipate high cash flow from rental income and don’t want to worry about verifying personal income. The different types of rental loans for DSCR are Long Term Rental Loans (or Buy-and-Hold) for or Short Term Rental Loans often used in conjunction with Air-BNB. In either case, one can borrow based on the anticipated cash flow from their rental income.

Bridge Loans or Gap Loans are also a common loan product that Private Money Lenders offer. These are often used by investors to buy additional property while they wait for other property to sell. In essence, they are using existing property collateral in order to make the purchase of a new property. Bridge loans usually have shorter terms (around 3 years) since their interest rates are typically higher than other loan products. Sometimes Bridge Loans are used for other purposes like to pay for relocation costs during a job transition or to pay for major renovations on a house. In all cases an investor is using existing equity in property to get a loan. You could also apply for a Fix-and-Flip Loan, which is a form of short-term financing that might be ideal if you wish to purchase and renovate a property before reselling it for a profit. You can structure fix-and-flip loans in a few different ways. For example, the loan can be provided to you as a line of credit that you take from when needed.

Private money lenders also offer Ground-up Construction Loans. These short-term loans usually have terms that last for six months to two years. The purpose of a ground-up construction loan is to cover the costs associated with building a home. If you still need to purchase the land, these loans can cover the initial costs as well as the ongoing construction expenses. You’ll likely need to refinance into a long-term mortgage once you’ve finished building the property.

Understanding the Differences Between Private Money Lender and Traditional Mortgage Lenders

When applying for a mortgage, you should view Private Money Lenders and traditional mortgage lenders as two sides of the same coin. While traditional traditional mortgage lenders offer some useful mortgage loans, private money lenders provide specialized ones that are more suitable for investors and people who may not qualify for a standard loan. In most cases, traditional lenders have the following characteristics:

• Slow application process with ample documentation
• Lower interest rates
• Lengthy approval process
• More regulations

As for Private Money Lenders, they have the following characteristics:

• Quicker approval process with less documentation
• Higher interest rates
• Simpler approval process
• Fewer regulations

Traditional bank loans are heavily regulated, which is why borrowers often need to have high credit scores and solid financials to be approved. Since private money lenders have fewer regulations, the application process is streamlined. You may be eligible for a loan even if you aren’t with a traditional lender. Since private money lenders usually charge higher interest rates, they’re able to offer more unique loans without taking on too much risk.

Choosing the Right Type of Lender

If you’re considering buying a home that you intend to live in for 20-30 years, a standard loan from a traditional lender may be right for you. In any other situation, it may be best to apply for a loan from a private money lender?. As touched upon previously, they’re much more flexible. Some of the loan terms can be negotiated as well. Even if you have poor credit, you could be approved for a loan from a private money lender. The main reasons why you should apply with a private money lender include the following:

• Receive your money in less than 10 days
• Negotiate for better and more accommodating terms
• Asset-based lending options allow for limited income documentation if you provide collateral
• terms are short
• More unique loans are available to you

Once you decide to buy a property, make sure you shop around to find the best rates. The many factors you should consider before applying include loan terms, closing costs, lending requirements, and interest rates. Call LoanPathLoans today to learn more about your loan options.