Your money comes from direct lenders, private investors and/or mortgage pools. For the most part, you only need to familiarize yourself with the practices of private money lenders. It can be helpful, however, to know that private lenders may source the capital for your loan in several ways. Where your money comes from may determine whether you’re approved and how quickly. A private lender may:
- Use their own money to finance your loan. The lending industry refers to them as direct lenders.
- Work with private investors – individuals just like you who are looking for an added return on their capital. (More about the risks of being a private investor or direct lender here.)
- Operate a mortgage pool from which they fund their loans. Private money fund managers raise money, then lend it out based on the pool’s guidelines.
More about direct lenders
Direct lenders have several advantages over other private lenders. Because the decision on whether or not to finance your loan is exclusively up to them, they can arrive at decisions faster. Lenders who can guarantee a fast close – even to new borrower clients – are almost always direct lenders.
Some direct lenders will have very flexible terms – if the deal is right they’ll find a way to make it happen. Others may have very narrow criteria and terms – they found their niche and they’re sticking to it.
More about lenders who work with private investors
When you bring a private lender a deal, they may shop it to their private investor contacts, similar to a loan broker. They will have typically narrowed it down to a few of their investor contacts as they have a solid idea of what loans are attractive to each investor. For private lenders who operate this way, you should be aware that you’re negotiating terms with both the lender and private investor. All parties must agree on the contract in order to fund your loan.
For larger loans, the private lender may raise money from several direct lenders and combine the funds into one loan for you. Brokers refer to this as fractionalized loans.
Direct Lenders or Private investors may be:
- One individual
- A group where each investor fractionally invests in your hard money real estate loan.
- A group of private investors who have already pooled their funds. They work with a commercial lending asset manager or loan broker to issue loans to qualified borrowers.
More about mortgage pools
Private lenders who operate mortgage pools are also referred to as fund managers. The advantage of this funding method is that the private lender has already raised the funds for loans (no “shopping the loan”), which eliminates some uncertainty as to whether or not your loan will attract an investor. In a mortgage pool, the broker or fund manager decides which borrowers they will loan to and sets the rates and terms according to the pre-established guidelines of the mortgage pool they operate.
Bringing it together
Direct lenders, private investors and mortgage pools each have their own advantages when it comes to flexibility of criteria, terms and approval speed. When completing due diligence, you should ask the private lender’s funding source can impact your deal.