6 min read
How Private Real-Estate Loans Work
A plain-language overview of private and hard money lending: how it differs from a conventional mortgage, and why investors use it.
A private real-estate loan — sometimes called a hard money loan — is financing from a non-bank lender, secured primarily by the value of the property rather than the borrower's personal income or a lengthy underwriting file. It's built for business-purpose real-estate transactions, not for buying a home to live in.
The core difference from a conventional mortgage is speed and structure. A bank mortgage is underwritten around your personal income, tax returns, and long-term ability to repay a 30-year loan. A private loan is underwritten around the deal itself: what the property is worth, what it will be worth after any planned work, and how the investor plans to exit the loan — usually by selling the property or refinancing into permanent financing.
Why investors use private financing
Real-estate deals are often time-sensitive. A seller may need a fast closing, or a discounted property may attract multiple offers. Conventional mortgage underwriting can take weeks and often can't fund a purchase that includes renovation costs. Private lenders are built to move faster and to finance the acquisition and the rehab budget as a single package.
This speed and flexibility comes at a cost: private financing typically carries a higher rate and shorter term than a conventional mortgage, because it's priced for a short hold period and a different risk profile. It's generally a tool for a specific, time-limited purpose — not a long-term financing strategy on its own.
What lenders typically evaluate
Most private lenders look at a combination of factors: the property's current value, its estimated after-repair value if renovation is involved, the borrower's plan for the property, and the borrower's experience with similar projects. Some lenders also review credit and available liquidity as part of the overall picture.
Because the loan is secured by real property and structured around a specific deal, the exact documentation and criteria vary by lender and by program. Ask any lender you're considering to walk you through what they'll need and why.