Banks underwrite borrowers. Private money lenders underwrite deals. That distinction drives most of the differences in speed, flexibility, and cost between the two financing channels. For investors working on fix-and-flip projects, distressed acquisitions, or unusual property types, understanding how private lending actually works determines whether a deal closes or dies.
What Private Money Lenders Are (and Are Not)
A private money lender is an individual, family office, or pooled investment group that deploys its own capital into real estate loans. They are not banks, credit unions, or licensed mortgage companies subject to the same federal underwriting standards (Fannie Mae, Freddie Mac, or FHA guidelines do not apply).
Hard money lenders are a subset of private money lenders. The terms are often used interchangeably, but hard money typically refers to institutional private lenders with standardized programs, while private money more often describes individual investors or small groups with more flexible, relationship-driven terms.
Both types use the property as the primary collateral. Loan-to-value (LTV) ratios, which express the loan amount as a percentage of the property's value, drive approval more than FICO scores.
How Private Lenders Evaluate a Deal
Most private lenders focus on three factors:
- Collateral value: What is the property worth today, and what will it be worth after improvements (after-repair value, or ARV)? Many lenders cap loans at 65-75% of ARV on fix-and-flip projects.
- Exit strategy: How does the borrower repay the loan? A defined exit (refinance into a DSCR loan, sell on completion, refinance into conventional financing) reduces the lender's risk.
- First-time investors typically face stricter LTV limits and higher rates than borrowers with a track record of completed projects.
