Private Lending Industry Update 2023 Q1

Like many other industries in this economy, it’s been an interesting time for private mortgage lending during the first quarter of 2023. In this guide we’ll explain some of the challenges that real estate investors have been experiencing lately when trying to get private financing, what’s happening in the capital markets, and what the average interest rates are for most private lending companies, which are also known as hard money lenders or bridge lenders.

This guide was published in April 2023. Much of the information we’ll share was gathered from talking to many of our lender clients and from attending 2 private lending conferences in the past 4 weeks. Let’s start by focusing on real estate investors who need private financing. 

Higher Interest Rates and Tightened Guidelines

The increase in interest rates is definitely a challenge for real estate investors, especially when it comes to long-term financing. For short-term financing, which is the reason that most people use private lending, it seems like most investors have adjusted to the higher rate environment. The interest rates for short-term loans up to 2 years are currently ranging from 10% to 13% for most lenders throughout the country. In California, the interest rates range from 8.5% to 11%. 

The higher interest rates have been around for over 6 months now, and it’s not the biggest hurdle for real estate investors. The bigger challenge is lending guidelines are tighter than they’ve been in 10 years, and most lenders have reduced their maximum leverage by 5% to 10%. For rehab projects, many lenders used to require a 10% down payment for the purchase. Now, most lenders are now requiring 20% down. 

For real estate investors that have reached the end of their rehab project’s loan term, many are surprised to find that their lender will not offer an extension. Or they’re shocked when they find out the new interest rate for the extension term and waste time shopping around for another lender that may offer better pricing. 

Bridge-to-Bridge Refinancing

We’re seeing a lot of real estate investors and brokers seeking a short-term bridge loan to refinance another bridge loan that matured. Most private lenders won’t consider this loan scenario. Refinance loans are the toughest ones to work with, and the least attractive for lenders, especially cash out loans. We get so many equity cash out loan requests, and most real estate investors are frustrated to learn that the maximum loan-to-value is much lower than what they thought it would be. 

If you can find a private lender willing to offer cash out for a short-term loan, 65% loan-to-value is the absolute maximum these days, and most lenders max out at 60%. While refinance bridge loans are difficult to get, most lenders love purchase bridge loans where the borrower contributes a sizable down payment of at least 30%.

Why Private Lending Guidelines Are So Tight

There are 3 primary reasons that most private lenders have tightened guidelines. The obvious one is that higher interest rates are making it harder for deals to pencil. If a real estate investor’s exit strategy for a short-term loan is to refinance into a long-term loan, they are less likely to qualify while the interest rates for those loans are over 7% at this time. 

The second reason for the tightening is values are dropping in many parts of the country across all asset classes, but especially for commercial real estate. If the property’s value reduces during the loan term, so does the value of the loan, and that puts the lender at risk. And the third reason that lenders’ have tightened so much is the lack of liquidity. 

Private Lenders Still Lacking Liquidity

Lack of liquidity means the capital which private lenders use to fuel their lending business is much more limited than it was in the past. The majority of private mortgages are sold to the institutional secondary market shortly after funding. The sale of your loan enables the lender to continue lending. The problem is that many institutions are not buying loans at this time, either because they have other high yielding investment opportunities, or because of uncertainty in the real estate market. This dilemma has caused many private lending companies to halt lending or scale back to extremely low levels of lending activity.

Some lenders don’t sell their loans, but instead put all of their loans on a bank warehouse line to recapitalize. With all the turmoil in the regional banking sector, many lenders are concerned about the funds being available in the future. Most of these lenders are still in a good position for now, but when the warehouse line term expires, there is uncertainty as to whether that bank will renew the line.

Some lenders manage a fund which holds all the loans until the end of the loan term. Many of these lenders are in a solid position to grow and thrive in this environment, mainly because there’s less competition from the lenders that sell their loans. I’m hearing that many private mortgage fund managers have lots of capital to lend and are getting a lot of interest from new capital providers to invest in their funds. However, many of them are rejecting new capital because there aren’t enough good loans for them to fund at this time.

Private Lending Volume Extremely Low

We started out with the pain that real estate investors are feeling, but we have to mention that private lenders are also feeling a lot of pain now, mainly because loan volume has dropped significantly. Almost all the lenders I’ve talked to the past 3 months have told me their loan volume is way down. This is not surprising since many lenders use the past 2 years as a comparison. There are not as many purchase transactions and not as many properties being built. Most lenders are rejecting a higher percentage of loan requests than ever before. 

The capital constraints and low loan volume has caused many lenders to downsize, and we’ve heard of many layoffs in our space. It’s definitely not as bad as the conventional mortgage space, but it’s definitely in the hundreds. On the bright side of this, I’ve heard of many smaller private lending companies looking to hire loan officers, loan processors, marketing executives and other talent.  

Conclusion and Predictions for 2023

While many private lenders are struggling to survive at this time, others are thriving and ready to prosper in the next phase of the economic cycle. Some of the biggest players in our industry are predicting the capital markets will stabilize in the late summer, and the capital will come back to the private lending space in the Fall. If that’s the case, private lenders just need to survive the next 2 quarters before loan volume increases.

Although everyone is feeling pain with real estate investing and private lending at this time, many private lenders are still actively lending on high quality deals. With tightened guidelines, most lenders are not considering borrowers with very low credit scores or other financial challenges. For rehab projects, most lenders have increased their experience requirements and won’t consider investors that have never completed a rehab project. And mentioned earlier, most lenders are requiring borrowers to bring more equity to purchase and refinance deals.


April 17, 2023