Many different factors affect bank loan approvals. When it comes to mortgage loans, banks most commonly focus on a person’s credit and financial history to determine how much financing to approve.
As a result, investors with lower credit scores often receive minimal financing from traditional lenders.
For this reason, many investors use private lenders to finance their real estate property loans to avoid rejected loans or weak financing. In this blog, we’ll discuss what you need to know about private lenders.
Private Lenders Focus On Assets, Not Credit
The most distinguishable difference between private lenders and traditional lenders is that private loans are most often asset-based. While traditional lenders, such as banks and credit unions, review an applicant’s credit and financial history before approving their financing, private lenders focus on an applicant’s assets.
For example, if a real estate investor applies for a rental loan from a private lender, this lender will assess the potential value of an investor’s property. Financing for that private loan will then depend on the value of an investor’s current holdings.
Private lenders’ asset-based financing model is one of the most common reasons real estate investors choose these loans over traditional mortgages.
Private Lenders Have Fewer Restrictions
Private loans also differ from traditional lines of credit because these loans are far less formal. Private lenders are simply private organizations that manage their own financing for potential applicants.
Since private lenders do not have to meet the same rules and regulations for reviewing and approving funding, these loans are often highly customizable and flexible.
Private Lenders Have Faster Approvals
One of the most important things you need to know about private lenders is that they can also approve loans at a much faster rate than traditional mortgage loans. Since bank loans must pass several different levels of review, investors who need quick cash flow are more likely to choose a private lender.
Private Lenders Offer Hard Money
If you’ve ever heard of an investor receiving hard honey, this means that they’ve received a short-term loan from a private lender. Hard money loans are one of the most common types of rental loans that investors benefit from.
When a private lender provides a hard money loan to an investor, this means that the investor is receiving immediate cash flow to finance their expenses while they pay off other obligations. These loans are also short-term and require investors to offer collateral.
Working with a private and hard money fix-and-flip lender is ideal for investors who need financing for fixing and flipping rental properties.
Private lending is a highly effective financing solution for investors who need immediate funding for short-term rentals and investments. Private loans allow investors to receive credit based on their assets with fewer restrictions, faster approvals and direct cash flow. We hope our guide to this financing model has made reviewing these loans more straightforward.
