Private Money Lenders: How They Work and When to Use One

Private money is not a bank

A private money lender is a non-bank source of financing for real estate investment. The capital comes from an individual lending their own savings or from a lending company that raises and manages investor money. Either way, the lender evaluates the property and the deal, not your W-2 and two years of tax returns.

That difference is why private money exists. An investor buying a distressed house at auction cannot wait weeks for a bank file to clear. A landlord whose income runs through a dozen LLCs cannot fit it onto a standard mortgage application. A house that needs a roof, wiring and a kitchen does not meet a conventional lender's condition standards. Private money answers all three: speed, flexibility on the borrower, and a willingness to lend on what the property will be, not only what it is today.

How a private money loan works

Most private money loans for investors are short-term, interest only and secured by the investment property. You pay interest monthly and repay the principal at the end, by selling the property (a flip) or refinancing it into a long-term rental loan (a hold). Market terms commonly run 6 to 24 months, with 12 months the most common.

The underwriting centers on three numbers: the property's as-is value, its after-repair value, and your exit. If the purchase and renovation leave enough room to sell at a profit or refinance at a payment the rent covers, the deal can work. Credit still matters, but as a threshold rather than the gatekeeper it is at a bank. Our lending partners set a 600 minimum for short-term loans.

The borrower is usually an LLC or corporation and the property must be non-owner-occupied. Federal Regulation Z treats credit for non-owner-occupied rental property as business credit, so the consumer mortgage disclosure rules and timelines do not govern these loans.

Private money, hard money and a bank, side by side

Borrowing from a person you know is a different exercise: where to find them, how to record the loan and the retirement-account rules are covered on private money lenders near me.

What private money costs

Private money costs more than a conventional mortgage. Across the market, short-term private and hard money loans commonly run about 8% to 15% interest, plus origination points of 1 to 4, where one point is 1% of the loan. Through our lending partners, standard fix and flip and bridge pricing is 12.99% plus 2.99 points: on a $200,000 loan that is $5,980 in points at closing and about $2,165 a month in interest-only payments.

The cost is the trade. You are paying for speed, for a lender who will fund a property a bank declines, and for leverage that can include the renovation budget. If the deal still works with that pricing built in, the financing is a tool cost. If it only works at bank rates, the deal does not work.

Pricing improves with a track record. Our lending partners offer 10.99% plus 1.99 points only to borrowers who have paid off two loans with them in good standing, so a first-time borrower should plan around standard pricing.

When to use private money

• Speed. The seller wants to close sooner than a bank can. A private lender deciding on the property can move much faster, though the appraisal and title still set the pace.
• Property condition. The house needs work no conventional lender will finance in its current state. A private loan can include the renovation budget and is sized on the after-repair value.
• Income documentation. You are self-employed, your income runs through several entities, or your tax returns understate what you earn.
• Portfolio growth. Fannie Mae caps a borrower at ten financed properties for investment loans and asks for a 720 score once you hold seven or more. Private and DSCR lenders size each loan on the property instead.
• Auctions and competitive offers. A lender that can fund on the property lets you make an offer that competes with cash buyers.

When not to use it

If you qualify for a conventional loan and the timeline allows it, take it. The only reason to pay a private money premium is that speed, the property's condition or your documentation rules out the cheaper route.

If you plan to live in the property, private investor money is not the answer. These loans are for non-owner-occupied investment property only; a home you will occupy needs a consumer mortgage from a mortgage lender.

Is private money lending regulated?

Yes, though less like a home mortgage. Federal consumer mortgage rules generally do not apply to business-purpose loans on non-owner-occupied property, which is part of why private money is fast. State law still applies: many states license companies that make or arrange real estate loans, and some cap interest rates. California's Financing Law, for example, covers commercial lenders and brokers. Check a company on NMLS Consumer Access or with your state regulator.

Fewer consumer protections means you read more carefully. Get a written term sheet, read the note and the personal liability terms, and walk away from anyone who promises funding before seeing the deal and wants money up front.

Dominion Hard Money does not lend its own funds; it arranges financing through third-party lending partners. The lending partner underwrites the loan, issues the terms and makes every credit decision.

Related guides

Finding private money near you · Free private lending guide · Working with a hard money lender · What private and hard money costs · Where our lending partners finance