Are private lenders less strict than the banks?

Are private lenders less strict than the banks in regards to their loan requirements?

Yes they generally are. They are more asset based than person based in their lending decisions. Although having better credit card and more skin in the game will reduce the interest you pay.

Thank you, SteveKay. As far I understood, a bank loan would be better. Maybe one should go for private money only when a mortgage loan application from the bank is declined?

There ‘are’ trade-offs to consider when seeking private money vs. institutional money.

**** It depends a LOT on your negotiating skills.

**** ‘Private money’ includes seller financing.

**** Institutional money repayment histories end up on your credit profile. Private monies rarely will, unless you don’t pay, and force a foreclosure.

**** Borrowing from Grandma is also considered ‘private money,’ and she’s basically qualifying you based on your relationship with her, with the expectation that you’ll take care of her when she’s drooling Kool Aid on her pajamas and needs help changing her diapers. Everything else can be irrelevant.

**** Terms are related to risk. The higher the risk, the worse the terms, if you’re borrowing from anyone besides the seller.

I’ve discovered that the sellers of non-performing property can be the first, cheapest, and fastest source of financing. These sellers are often motivated to finance a buyer in order to either get a higher price; get money faster; or just effect a sale at all. I like the last category of sellers.

There’s more than one reason for a seller to consider financing a sale. It’s profitable to find out what is their motivation (and how motivated they are), and then ask for terms based on what you learn.

For example, not all sellers need ‘all’ cash. Some just need relief from a headache. So, one option is to offer a fast and sure solution that will relieve their headache. Of course, that solution also includes seller financing.

And because the property needs so much work, you don’t want to put up two down payments; one to fix the place and another one to finance it. So, you’re willing to take on the headache, and give the seller close to his asking price, in return for ‘nothing down.’

Of course, the seller didn’t just fall off a turnip truck, and has forty-two books on “Wheeling and Dealing Just Like a ‘Re-la-tor’ Pro” is on his shelf, and he insists you have to have ‘skin in the game.’ (How cute.)

So, you offer to show him your repair money, and agree to put it in escrow, to show you can do the repairs, and the give yourself the ability to draw from those funds as necessary for repairs without hindrance, and viola, you’ve ‘got skin in the game.’

Then of course, you point out if things went belly up, he’d get a property back that’s all fixed up. Yay for him, and boo for you.

*** There’s an axiom that has helped me in my negotiations, “Give the seller what he wants, and you take everything else.”

That all said, if the price is a steal; you don’t care if it hurts your immediate borrowing power; and pulling your pants down around your ankles for an anal examination of your income and credit history is not at all an invasion of your privacy and dignity; then sure, go ahead and borrow from a bank.

Otherwise, with seller financing, you might have to pay a little more up front (depending on your negotiating skills), but nobody is checking out the hairy moles on your butt.

Is it generally easier to get approved by a private lender than a traditional bank, as private lenders are able to customize each loan based on a set of internally set criteria, such as credit scores, loan to value ratio and debt to income levels. Bank approvals are program or computer driven with little discretion available to the lender. Private lenders generally take a more common-sense approach to understanding issues and overcoming them.

@javipa, Thanks a lot for the detailed answer! It was very helpful!

@heartlandbuyshouses Thank you!

less strict? it really depends who you have a relationship with. And are you rally talking about private or hard. This seems to be a definition that has been blurred. Private is something I do. I have my own money and i lend it out to people i have developed relationships with over a long time. The people that borrow money form me consider it an easy process. One house, one signature, one loan, done. However the process of applying is something that took months or years. The application process was I guess the “strict” part. They had to prove themselves to be sound decision makes. They had to be able to show process and due diligence.

When it come s to hard money , which a lot of investors seem to call private money - they can be as strict or more than a bank. The basically are banks. they require all the same paperwork etc.

I hope this helps a little. Don’t let finding money deter you. If you do find a home run deal you will find the money. Someone will give it to you. Hell i would myself if the next example was the case. Thing is it would just cost you.
So the extreme example to prove my point…
You find a house with ARV 300,000. You can buy it for $50,000. The rehab is 50K. Back of the napkin shows you stand to make $175,000. So what do you do? do you say oh well i cant find the money? NO! honestly are you happy making 50K? it doesn’t matter what the other guy makes but in this scenario i would lend you the money after some very quick analysis. Heck I would build in the cost of flying out there tomorrow to verify the deal. Let’s say you called me and i said yes i will give you the money but it will cost you $100,000 in fees interest and the rest.
Would you pass on the deal just because I am making 100K or would you be stoked to make $75K (oh by the way in this perfect scenario the rehab actually goes to plan, is done in 4 weeks, you list it immediately it goes under contract in 3 days and is closed 2 weeks later.

I’m making to points - you can find the money and too many people get tied up in worrying about what the other guy is making… Dont! be happy with your return and move on to the next.

Private Lenders only lend money when they know the investment is good and they will get a return. Private lenders only allow you to borrow for a small amount of time. They have strict criteria but work more with investors than banks work with investors.