Private mortgage lenders vs. banks—what’s the difference? While it might seem like a trivial decision, who you choose to finance your real estate purchase can make a huge impact on your experience.
Buying a home can be a complex process.
It’s a huge financial decision purchase that you want to make with confidence. One of the most important parts of buying a house is how you fund the purchase.
Unless you have half a million dollars liquidated, you will need to take out a loan to cover the costs of the property. That’s why you should know the difference between private lenders and traditional banks.
There are different types of loans and lenders you can use to do this. We want you to feel confident in your financial decision. That’s why we describe the difference between working with private lenders vs traditional bank loans.
What Is a Private Lender?
Private lenders are individuals or a group of individuals who loan money to a borrower without being backed by a bank or credit union. Private lenders can be companies or a family member.
Private lenders are a great option for both real estate and personal loans. Private lenders are a bit more accommodating because they don’t have to succumb to the rules and regulations of a bank.
Although private lenders and traditional banks have their differences, the process of obtaining a loan is similar. You get approved to buy a property, make the purchase, and slowly pay off the debt over the course of the loan.
Private lenders often offer alternative financing options for various purposes, including real estate investments, business ventures, personal loans, and more. These lenders can be individuals seeking to invest their own capital or specialized lending companies that focus on specific types of loans.
Commons Characteristics of Private Lenders
Here are a few common characteristics of private mortgage lenders:
- Non-Institutional Source: Private lenders are not traditional banks or financial institutions. Instead, they operate independently or as part of private lending firms.
- Flexible Terms: Private lenders often offer more flexibility in terms of loan structures, repayment schedules, and eligibility criteria compared to conventional lenders. This flexibility can be especially advantageous for borrowers with unique financial situations or investment strategies.
- Asset-Based Lending: Private lending is often asset-based, meaning the loan is secured by a valuable asset, such as real estate, that serves as collateral. This allows private lenders to mitigate risk by having a tangible asset to recover if the borrower defaults.
- Speed and Efficiency: Private lenders can offer faster approval and funding processes compared to traditional lenders. This speed can be crucial for borrowers who need quick access to capital.
- Diverse Loan Types: Private lenders can provide various types of loans, such as hard money loans, bridge loans, short-term business loans, and personal loans. Each loan type caters to specific borrower needs and investment goals.
- Less Stringent Credit Requirements: Private lenders may focus less on credit scores and more on the value of the collateral or the potential of the investment.
What Is a Traditional Bank?
A traditional bank loan is a loan that you receive from a bank or credit union. Before there were private lenders and investors, the bank was the only place to get a mortgage loan. Hence why it’s called the traditional method.
Banks use the money they obtain from depositors to buy mortgages. They then make money off the interest of the mortgage loan once the home has been purchased. Since banks are a financial corporation there are many more rules and regulations that they must follow compared to private lenders.
Private Mortgage Lenders vs. Banks?
There are similarities between private lenders and traditional banks but they both have some unique traits to differentiate them.
For starters, banks are much more strict than private lenders. Private lenders have the ability to be much more accommodating to their clients, creating flexible contracts that help them reach their real estate goals. Banks have strict requirements that each potential homeowner needs to meet in order to be approved.
Banks require certain credit scores and only offer a few loan options, making it more difficult for homeowners to get approved for a loan that truly meets their financial goals.
One of the main differences between working with a private lender vs working with a bank is the overall experience. Banks are large corporations subject to federal compliance and reporting law. There are a lot of hoops that these corporations need to jump through to get you your loan. The process of getting approved and actually getting your money takes much longer when working with banks.
A lot of homeowners get a mortgage from their bank because they already have an account there. Most homeowners don’t know the benefit of working with a private lender over a bank.
Advantages of Choosing a Private Lender vs Bank
There are many advantages of working with a private lender compared to a bank. Here are a few of the key benefits of using a private lender to fund your home.
More Flexible
Private lenders are much more flexible than traditional banks. They are willing to negotiate on terms of the loan to fit your financial goals. If you have poor credit, a bank won’t even let you in the door. A private lender is willing to work with you and make a plan that works for both parties, getting you the funds you need to purchase a home.
Get Your Money Faster
Private lenders are able to get you your money so much faster than banks. With banks, everything is a process. It takes weeks simply to get approved and 2 to 3 weeks to actually get your money.
Private lenders can get your money within a week, which can be the difference between getting your offer accepted or not.
Asset-Based Lending
Private mortgage lenders frequently focus on the property’s value and condition rather than solely relying on the borrower’s financial history. This can be advantageous for borrowers with valuable collateral but limited income documentation.
More Accommodating
Banks have thousands of customers. At a bank, you are simply a number, while a private lender actually takes the time to build a relationship with their clients. Private lenders create a more personalized experience for homeowners than banks do. They understand that building relationships are more important than money.
Shorter Loan Terms
Private lenders often offer shorter loan terms, such as one to three years, making them suitable for borrowers who plan to sell or refinance the property in the near future.
Specialized Loans
Private lenders may offer specialized loan types, such as hard money loans or bridge loans, which are designed for specific purposes like property renovations or short-term investments.
Variety of Loan Options
Since private lenders don’t need to abide by the same rules and regulations as banks, they can offer more loan options. More options mean more personalization, getting you a loan that’s just right for your situation.
One of the benefits of offering a variety of loans is the experience and knowledge that private lenders need to have on these products. A private lender will be able to offer you financial advice and guide you through the terms of each type of loan to find which loan is best for you.
Get a Free Quote from a Private Lender
Now you know the difference between private mortgage lenders vs. banks—next, it’s time to take action.
Buying a home for personal or investment purposes is a big financial decision. You want to make sure you are getting the best deal possible because hundreds of thousands of dollars are at stake.
Working with a private lender is a great way to gain a deep understanding of the different types of loans as well as the loan approval process. At Yieldi, we make sure our clients have the best mortgage loan experience possible.
If you are looking for a home loan, reach out to a private lender when comparing rates and terms. You might be surprised by the offering!
Get a free quote on a mortgage loan from a private lender by contacting our team.