Capital Structures Used by Private Mortgage Lenders

Almost all private and hard money lending companies use external capital to run their business. In this article, we’ll cover 5 different capital structures used by private mortgage lending companies, and how loan originators can find new capital providers.

This topic may not be of interest to people who are not in the mortgage business. If you’re a real estate investor, you may not care how your lender gets their capital. Most private lending firms have multiple sources of capital which they can tap for various types of loan requests.

It can be a lot of effort to figure out a lender’s capital source per each deal, and perhaps it shouldn’t matter to you. As long as you’re getting good service, competitive pricing, and the lender can execute, it may not be worth thinking so much about where the money comes from or what happens to your interest payments.

Many real estate investors visit our website looking for a private money lender who lends out their own funds and doesn’t charge any points. These are typically individual investors who only lend in their local market and they are not easy to find. The money comes from their personal retirement account, and at some point they will run out of funds to lend.

When you deal with a private lending company, also known as a hard money lender, you’ll probably never hear them say that they’ve run out of money to lend. If the loan request meets their criteria, they will likely have the money to fund the loan.

That said, there was a 6-month period in 2020 when a lot of private lending companies did not have the money to lend. This was the result of one capital structure, relied upon by many lenders, which faced a lot of challenges when the pandemic hit the United States. However, there were many other lenders that were still lending during that period, and this was made possible because they used a different capital structure. So if there is another major economic event, that may be the time when a real estate investor would care to know about a lender’s capital structure, because it may determine the lender’s ability to perform, and it could affect the pricing as well.

The 5 Private Lending Capital Structures

Capital Structure #1 – Mortgage Investors

With this first capital structure, the lender doesn’t need to have any of their own money. They just originate the loan and find one or more mortgage investors to fund the loan at closing. This capital structure may also be called “Table Funding.”

The mortgage investor is typically a private individual, but it could be a family office or an investment firm that wants to hold the note and receive the interest payments directly. In most cases, it’s one investor to one loan, but some lenders will syndicate to multiple investors who will each have a fractional interest in the note or deed of trust.

Some people consider this loan brokering, but many lending companies using this structure would argue that they are not a broker in this case because the mortgage investor doesn’t participate in the origination or underwriting of the loan and doesn’t charge any origination fees.

Some states which require lenders to be licensed will define certain rules with this practice. For example, when arranging a loan under a California Department of Real Estate license, you are considered a mortgage loan broker, and the loan documents have to disclose the name of the trust deed investor prior to closing.

Capital Structure #2 – Fund and Portfolio

Many lenders will close the loan using their own funds and keep it on their books to collect the interest payments throughout the loan term. The key element to this structure is the lender will likely have a revolving line of credit from a bank which enables them to grow beyond the total of their own cash.

Each loan may be pledged as collateral on the credit line, and the line is paid down as the loans are paid off. The lender essentially borrows money from a bank at a low interest rate, and lends it out to real estate investors at a higher interest rate to make a spread, plus origination fees of course.

Getting a bank credit line secured by private mortgages is not easy. The banks that offer this are typically small community banks that only accept loans secured by properties in their own state or region. Texas is one state where this is popular.

Not all lenders that keep their loans are using a bank credit line, but many lenders that have a sizable portfolio of loans likely have access to a credit line in case they ever run out of funds to lend. There are many capital providers out there that offer note-on-note financing, so a lender can always pledge some of their notes as collateral to get more capital whenever needed.

Capital Structure #3 – Fund and Sell

This is one of the most popular capital structures used by lenders. The lender funds the loan off their own balance sheet and will sell them to the secondary market shortly after funding, with no intention of keeping any loans on their books. They can make a spread on the sale, plus points and other fees.

For some lenders, their secondary market may be individual investors. For others, it may be a fund backed by insurance companies. However, most private mortgages today are sold to an institutional investment firm that buys hundreds of loans and packages them up to be sold to the public markets.

These firms are also known as Aggregators, or Loan Traders. Many of these firms entered the private hard money space around 2015 to 2016, and their appetite for private mortgages has grown enormously.

The main benefit of selling loans to aggregators is efficiency. As long as the loan fits the box, the sale process is streamlined so lenders can quickly recapitalize and continue to lend.

One potential downside is the capital is tied to Wall Street. So if there is a major economic event like what happened in early 2020, the capital may not be available for a period of time.

Capital Structure #4 – Partnerships

Most lenders have strategic partnerships with other private lending firms that can fund loans which are outside of their area of expertise, or loans that require additional capital which they don’t have.

For example, a lender that mainly does residential fix & flip loans may come across a large bridge loan request for a commercial property which is not in their wheelhouse. Or a lender in California may get requests for loans in other states which they won’t fund themselves, but they can originate the loans and still earn a fee.

The key distinction here is that both lenders charge origination fees, so it’s essentially a brokered loan. It’s rare to find one of these partnerships where the actual lender doesn’t charge any points.

Capital partnerships have existed in private lending for many years. However, this concept was taken to another level starting in 2018 when there was an enormous amount of institutional capital in the private mortgage space.

Many of the large national lenders began offering a formal partnership program where any mortgage broker or lender could use their institutionally-backed capital to originate loans nationwide. Some of these programs offer an opportunity to earn origination fees and an interest yield spread.

There’s a few terms used to describe these capital partnerships:

  • Correspondent Program – Many people have a problem with this term because it has a different meaning in the consumer mortgage world.
  • Table Funding – Some people define table funding as the first capital structure we mentioned, when the actual lender is just an investor who is not involved in the underwriting or processing of the loan.
  • Wholesale Lending – Broad term that is widely accepted

Each of these capital partnerships have different fee structures. I’ll write a separate article to cover this topic in detail.

Capital Structure #5 – Mortgage Funds

A mortgage fund seems to be the most desirable capital structure among private and hard money lenders. It offers the greatest amount of control and scalability. But pooling funds from multiple accredited investors is extremely difficult, and it takes years to build up.

When a lender launches a fund, they have to spend a lot of their time on capital raising, or they’d have to hire someone for investor relations. We’ve seen a number of lenders that start off with the one-investor-one-loan model, and then convert to a fund. These lenders have a head start because they already have the investor relationships.

Until the fund is well-capitalized after a few years, the fund manager is likely using one or more of the other capital structures mentioned earlier. However, even lenders with an established mortgage fund will likely have partnerships with friendly competitors, and if they come across a loan that doesn’t fit their fund’s parameters, they may take it to one of their high net worth investors to fund.

Most loans funded using a mortgage fund will be kept in the fund until payoff. It’s very rare for a mortgage fund to sell a loan, but we’ve seen a new trend in the past year where a lender will form a mortgage fund for the purpose of closing loans which will be immediately sold to the secondary market.

For the fund investors, it offers liquidity within 30 days. And the benefit to the lender is it’s a great alternative to getting a bank credit line which bears the risk of being pulled when there’s a credit crunch.

How to Find Private Mortgage Capital Providers

Most lenders use a combination of capital structures with a variety of capital sources. With all the capital flooding the private lending space, it makes sense for lenders to explore all their options.

If you’re a loan originator seeking additional capital sources, use our website as a resource. Our Service Provider Directory has a Capital Section with several different categories:

The capital providers pay us a monthly advertising fee to be listed, so there is no cost to make contact through our website.

Top 2nd Mortgage Lenders in California

A very small percentage of private & hard money lenders in the United States will consider a 2nd mortgage, or any junior lien position. It’s a risky proposition for a lender if there is a default, which leads to a foreclosure. Second mortgage private lenders are a bit easier to find in California as opposed to other states. Here are some of the general guidelines for most private lenders that offer 2nd mortgages:

  • Loan Types: Refinance & Equity Cash Out
  • Loan amounts from $30,000 to $10,000,000
  • Combined Loan-to-Value up to 65%
  • Loan Type: Refinance,  Equity Cash Out, Cross Collateral
  • Property Types: Residential or Commercial Real Estate
    • Primary Residence OK if funds used for business purpose

Most 2nd mortgages are used for cashing out equity on a California property. Hardly any private lenders in California will consider a 2nd mortgage for a property purchase. None of the lenders on our platform consider gap funding.

Some lenders will take a 2nd position when cross collateralizing. Typically crossing collateral occurs when a private lender is funding a 1st position loan secured by one investment property, and they take a 2nd position on the borrower’s other property for additional security to reduce the loan-to-value for the loan.

Top California Private Lenders for 2nd Mortgages

Below is a list of the top private/hard money lending companies listed on Private Lender Link that offer private 2nd mortgages secured by real estate in California. All of these companies only lend in California.

Stonecrest Logo

Stonecrest Financial was established in 1987 and manages several funds which are very well capitalized. While most of their 2nd mortgage loans are secured by properties in the San Francisco Bay Area, they do fund a lot of loans throughout Southern California.

Here are some of Stonecrest’s lending guidelines for 2nd mortgages:

  • Loan Amounts from $250K to $10M
  • Combined LTV up to 65%
  • Interest Rates for 2nd mortgages: 9% to 12%
  • Loan Term: 1 to 60 months
  • Property Types: SFR, Condo, Multifamily, Office, Retail, Industrial, others
    • Owner-Occupied Homes OK if loan is for business purpose

Stonecrest Financial has an excellent reputation in the mortgage industry. They have been listed on Private Lender Link since 2016. We have visited their office in San Jose several times and spent time with their executive team.

2nd Mortgage Line of Credit

One of the reasons Stonecrest is the top California lender for 2nd mortgages is their unique line of credit program. Many real estate investors love this option in a scenario where they don’t need to use all the cash out funds right away. Stonecrest can provide a credit line so that the borrower only pays interest on the funds used. This is also a popular option with business owners that need working capital. The loan can be secured by equity in the business owner’s primary residence, or an investment property, or both. Stonecrest will consider using multiple properties as collateral for a single loan.

The maximum loan term is typically 3 years. Stonecrest can also provide their credit line for a 1st mortgage. Or they can fund the 1st as a standard bridge loan at a slightly lower interest rate, and a 2nd mortgage as a credit line with a smaller loan amount. We have not found any other private lending companies in California that offers a line of credit private mortgage secured by a single property.

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SDC Capital logo white bg

SDC Capital is a family office lender that lends in major markets throughout California. The majority of their lending is in Southern California, but they also fund a number of 2nd mortgages in the Bay Area and Sacramento.

One unique thing about SDC is they rely on their own in-house valuation and hardly ever require formal appraisals. This could save a few days in the closing timeline for residential properties and 1-2 weeks for commercial properties. If the subject property is located in Southern California, one of the principals will drive to the property to meet the borrower and do an inspection. For properties in Northern California, they have a representative who will visit the property.

SDC Capital tends to be lower on origination fees (points) than other lenders, but that may not be the case for a 2nd mortgage. It really depends on a number of factors – location, CLTV, property type, etc.

Here are some of SDC Capital’s guidelines for 2nd mortgages:

  • Loan Amounts from $100K to $2M
  • Combined LTV up to 65%
  • Interest Rates for 2nd mortgages: 9% to 10.99%
  • Loan Term: 3 to 24 months
  • Property Types: SFR, Condo, Multifamily, Office, Retail, Industrial
    • Owner-Occupied Homes OK if loan is for business purpose

SDC has been listed on Private Lender Link since 2016. We have visited their office in Burbank (Los Angeles County) and meet their executives at industry conferences every few months.

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brookline group logo

The Brookline Group sounds like a big company, but it’s really one trust deed investor, Michael Klemens, who lends out his own retirement funds. He has been offering private money loans since 1989. He is licensed by the California Department of Real Estate, so he also originates and processes the loans himself. Mike will consider properties throughout the state and has funded a lot of 2nd’s, 3rd’s and even a few 4th mortgages.

Mike’s maximum loan-to-value for a junior lien is 50%, which is much lower than the other lenders mentioned here. He hardly ever requires an appraisal since the LTV is so low. If the property is located within 100 miles of Los Angeles, he will likely drive to the property and meet the borrower in person.

Here are some of The Brookline Group’s guidelines for 2nd mortgages:

  • Loan Amounts from $30K to $1.2M
  • Combined LTV up to 50%
  • Interest Rates for 2nd mortgages: 8% to 12.50%
  • Loan Term: 1 to 60 months
  • Property Types: Land, SFR, Condo, Multifamily, Commercial
    • Owner-Occupied Homes OK if loan is for business purpose

Mike Klemens has been listed on Private Lender Link since 2018. We have spent time with him at several conferences hosted by the California Mortgage Association which is where we initially met.

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Click the green buttons above to view each lender’s profile. Private Lender Link has found all of companies mentioned above to be very reputable.  If you make contact with them, please mention that you read about them in this article.

Contact us if you’d like any lender recommendations for private and hard money lenders in California and other states throughout the country.

Correspondent Lending for Private Hard Money Lenders & Brokers

There are now several private lending companies in the market that offer a Correspondent program to fund private/hard money loans, by partnering with loan originators. The term correspondent is not as well defined in private lending as it is in conventional lending. In the private mortgage world, it’s also referred to as table funding. The key difference from the conventional correspondent lending is the correspondent partner does not need to use their own money to fund the loan.

The expansion of correspondent programs in private mortgage lending started in 2018. The increased competition for deal flow spurred this creative way for lender to get more deals. The companies offering this program are typically national lenders with a large operation that also originate loans themselves. They already have a back office and efficient system to fund loans in multiple states. Some of them offer a white label solution in which a separate entity has been set up for closing, so that the lender’s brand is masked. Other lenders simply offer lower pricing for loan originators and call it a correspondent program, or table funding.

How it typically works:

  • Loan Originator goes through approval process
  • Originator advertises Correspondent loan program to their clients as if it were their own
  • Originator presents deal to Correspondent
  • Correspondent evaluates loan request
  • Originator issues a term sheet to Borrower without reference to Correspondent
  • Correspondent does not communicate with Borrower
  • Correspondent funds the loan and retains servicing
  • Originator maintains relationship with Borrower

Correspondent lending is typically offered for residential investment and multifamily properties. However, there are a small number of lenders offering this program for commercial real estate – office, retail, industrial, assisted living facilities and others.

Compensation

Origination Fee
Most private lenders that offer a correspondent program will charge an origination fee. We’ve found that amount to typically be in the range of 0.50 to 1.25 points. The loan originator can add their origination fee on top of that, and there may be limits. The lender may not like to see the total origination fee being too much higher than what they charge.

Interest Rate
The interest rate spread is what makes a correspondent program attractive. A loan originator can earn a rate spread for the duration of the loan and not have to handle the loan servicing.

Additional Fees
Some Correspondents offer the opportunity for the loan originator to earn a spread on additional fees like credit reports, background checks, and appraisals.

An Alternative to Brokering

Many mortgage brokers that have a correspondent relationship for private lending are advertising themselves as a direct lender, which may give them more credibility with their clients and give them an edge over their competition. This not necessarily good for other private lenders in the market, but all lenders may want to consider forming a correspondent relationship to monetize good leads that they cannot fund in-house. Some private lenders only lend in one particular region. If they get a lead for a deal outside of their lending area, they can use a correspondent to get that deal funded, without risking their own capital.

Lenders Offering a Correspondent Program

Our site has a Capital Directory which includes institutional note buyers, capital advisors, and correspondent programs. Below are a few of the companies that have set up a correspondent lending program:

Contact us if you have any questions about these companies or private mortgage correspondent programs. We will continue to add more companies to our Capital Directory and make an effort to maintain a database of many capital providers in the private lending industry.

Credit and Financial Requirements for Private Mortgage Loans

Private and hard money lenders generally do not have a lot of requirements when it comes to credit history and financial documentation. Equity is the primary factor in a private lender’s decision to fund a loan. For a purchase, how much equity (or cash) is the borrower bringing to the closing table. For a refinance or cash out, is there a sufficient amount of equity (35% for most private loans)? For a residential fix & flip, will the after-repair value result in at least 35% equity, and how much is the borrower contributing to the project?

That said, some lenders do have a minimum credit score requirement. Here on PrivateLenderLink.com, every lender must indicate their minimum credit requirements, if any. Even if the credit score is not a factor, lenders may check a borrower’s credit report to make sure there is no fraud, judgements or liens which may affect the lender’s security.

Many private lenders will ask for 3 months of bank statements to make sure the borrower has enough money to pay any expenses required to operate the subject property. For a commercial property, the lender will want to see a rent roll to make sure the income is sufficient to make the interest payments. For a rehab fix & flip project, a lender may be funding most of the project costs, but they wants the borrower to have some cash in the bank in case the project goes over budget.

We’ve seen some lenders use the borrower’s credit score to determine the interest rate and fees. Regardless of the loan-to-value, a lower credit score may give a lender a reason to charge a higher interest rate and additional origination fees.

Vacant Land Loans by Private & Hard Money Lenders

If you’re seeking a mortgage secured by vacant land, a private or hard money lender may be a good alternative to a bank. However, land loans are not a common offering, even among private lenders. A very small percentage of private lenders in the United States will consider land as collateral for a loan because it’s very risky.

Private mortgage lenders always have to consider the worst-case scenario when evaluating a potential loan funding. That worst-case scenario is having to foreclose and own the subject property. No lender wants to end up owning a piece of land. Here are a few reasons:

  • Difficult to Sell
    Land is the least desirable type of real estate. Even if the asking price is 50% of the value, there are not many buyers out there for unimproved real estate.
  • Lack of Income
    Most land does not produce any income. If a lender is not able to quickly sell the property, they will have to hold it for a long term while having to pay property taxes and other expenses.
  • Lack of Development Experience
    Even if the land has entitlements and can be developed, a lender may not have the expertise or experience to continue the project.

In order to justify the risk of lending on vacant land, private lenders will be much more conservative than they are with loans for improved properties.

Guidelines for Private Land Loans

Loan Purpose

Private lending is only for investment purposes. If you’re buying land on which you’re going to build your dream home, that’s a consumer purpose loan, and not something a private lender will consider.

If you’re cashing out equity on a piece of land, the funds must be used for a business or investment purpose.

Leverage

The maximum loan-to-value for vacant land is 50%. That’s the same whether it’s a refinance or a purchase loan.

If you’re buying land, you’ll need to have a cash down payment of at least 50% percent of the purchase price. Or some lenders will consider using equity in another investment property instead of cash. This is called cross collateralization.

If you’re refinancing or cashing out equity, the maximum is 50% percent of the as-is value. And no lender will consider a 2nd mortgage on vacant land, so it has to be a 1st position mortgage.

Not all lenders will go up to 50% LTV. Some lenders max out at 25%, and some go up to 40%. We have seen a few lenders going up to 65% LTV for land, but this is only for very experienced developers with commercial real estate development projects in prime urban areas, with loan amounts over $2,000,000.

There are a few factors which could determine the lender’s max leverage on each deal, including the location, the type of land, the land’s status, and it’s potential use.


Land Types / Classifications

It’s good to know the various loan classifications, because this will be discussed when you request a land loan. Most private lenders will only consider land if it’s in an urban or suburban area.

Infill Land

Some lenders only consider infill land which means the lots surrounding the subject property are developed with buildings on them. If your land is surrounded by other vacant lots, it will be less attractive for a lender.

Timber Land

If your land is filled with tall trees, in a forest-like setting, a very small number of lenders will consider it, but the LTV has to be extremely low, say under twenty five percent.

Agricultural Land

If the subject property is agricultural (ag) land, that’s more attractive to a lender than timber land because it likely generates income. However, ag land also has a limited pool of lenders that will consider it. If you do find a lender for ag land, the first thing they will ask is what type of crop is grown on the land.

Covered Land

This term is primarily used in commercial real estate deals where there is an existing structure on the property, but the plan is to tear it down once the new development project is approved. Some CRE private lenders provide bridge loans for these properties with a plan to be paid off by a construction loan.


Land Status

In addition to the land classification, the lender will ask for the status of the land or the development stage. Is it entitled? Has the city or county approved it for a specific use, such as a single family home, multifamily, retail, etc.?

Entitled Land

In simple terms, a property is entitled when the city or county has approved it for a certain use – single family home, multifamily, industrial, retail, etc. Entitled land is more attractive to a lender than untitled land because it’s easier to sell, just in case they end up owning it as a result of foreclosure.

Raw Land

If the property doesn’t have any utilities connected to it, it’s referred to as “raw land”. If it does have water, sewer and electricity connected, then it’s past the stage of being raw land and may just be called “vacant land” whether it’s entitled or not.

Shovel-Ready

A piece of land being shovel-ready means it has building approvals and the next step is construction. Some investors will get their land to the shovel-ready stage and sell to a developer. If this is the case, a short-term bridge loan can be a good financing solution until the property is sold.


Exit Strategy

Once you’ve determined that your land loan qualifies based on the loan purpose, LTV, location and stage, the lender will want to know what your exit strategy is.

  • How will the loan be paid back?
  • Are you planning to develop the property and have the land loan paid off by a construction loan?
  • Are you planning to sell the land?
  • Will another one of your properties be sold to pay off the land loan.

If you don’t have a solid exit strategy, it will be very difficult to get a loan from a private lender, even if the subject property is not vacant land.

Interest Rates for Land Loans

The pricing for private money land loans varies by region, location and many other factors, but it typically ranges from 10% to 15% interest, plus 2 to 4 points (origination fee).

We have seen some land loans go down to 8% interest for entitled land in prime urban locations with an extremely low loan-to-value.

Most lenders will require you to make monthly interest payments. Since vacant land doesn’t generate any income, you’ll have to show the lender that you have the ability to make the payments.

To avoid having to make monthly interest payments during the loan term, you could ask the lender to build an interest reserve into the loan, but not all lenders will consider this.


How to Find Lenders for Vacant Land

You can find direct private hard money lenders right here on our website, and we have a filter you can use to easily find out which lenders consider vacant land.

  1. Start at the Find a Lender page
  2. Select one of these 4 Loan Types: Private Money, Hard Money, Residential Bridge or Commercial Bridge
    (The first 3 will have similar results. Commercial Bridge tends to show lenders with a minimum loan amount of $1M.)
  3. Type in a state or major metro area, and click SEARCH
  4. Browse the list or click REFINE RESULTS in the Filters section
  5. From the Property Type field, select Residential Land or Commercial Land
  6. View each lender’s profile to learn about their guidelines, background and more
  7. Click the green CONTACT button and reach out to the lender directly

Fees Charged for Private Mortgage Loans

Most private and hard money lending companies do not charge any upfront fees prior to funding a loan, especially for residential properties. However, we have seen some private lenders charging various types of fees prior to funding, and in many cases it shouldn’t be a deterrent. Some fees are reasonable or common for private lending, and every lending company has their own policies on this matter. Upfront fees for commercial real estate are typically different than residential property.

We require all lenders on our platform to indicate which fees they charge, and whether the fees are charge before closing. You can find this information on each lender’s profile.

Below are some of the types of fees we’ve seen lenders charging prior to funding short-term private mortgage loans…

Appraisal Fee
Many private and hard money lenders will not require an appraisal, but some do. If an appraisal is required, the fee is typically paid directly to the appraiser.

Deposit
Deposits are more common for commercial real estate bridge loans, but we have seen some private lenders requiring a deposit for a residential property loan. Most lenders who do charge a deposit have decided that they are going to fund the loan, but they want a commitment from the borrower. This may be completely reasonable because a private lender may spend a lot of time and effort to complete the process of funding the loan. It would be a huge loss for the lender if the borrower decided to back out of the deal.

Site Visit Fee
For private lenders who only lend in one single market will typically visit every property they fund and meet the borrower as well, without charging any sort of fee for their time and travel. We have seen some private lenders who lend throughout the United States, and they still need to visit the property. This is more common in commercial bridge loans, and sometimes the site visit fee is included in the deposit, if applicable. Most residential property lenders that require an appraisal will not need to do a site visit. We’ve seen site visit fees range from $500 to $3,000.

More info about other types of fees will be added soon.

Private Lending for Owner-Occupied Homes

Most private lenders will not consider a borrower’s primary residence, or a vacation home, as collateral for a private mortgage. If a borrower has a 4-unit residential property and lives in one of the units, this is still considered as owner-occupied, and private lenders won’t touch it. The main reason is government regulations. Private lending is really just for investment real estate.

There are some exceptions, and there are also some alternatives to getting a home loan from a bank. For private lenders, the purpose of the loan is more important than the occupancy. If a borrower owns a business and needs to take equity out of their primary residence to use for the business, there are some private lending companies on our platform that will provide a loan in this situation, if the property is in California. Another scenario acceptable to some California private lenders is if the loan proceeds are used to purchase an investment property. Some private lenders offer “residential bridge loans” which is used if a borrower is purchasing a new primary residence and needs to use the equity from their current home which will be sold shortly after the closing of the new home. The loan term for this situation is typically 11 months.

We have only one lender on our platform that offers consumer-purpose owner-occupied private money loans, but only in California: Pacific Private Money.

If you are having trouble qualifying for a mortgage from a bank or institutional lender, we have a few companies on our platform that offer “non-prime” mortgages which is slightly more expensive than a bank, but they can accommodate borrower with lower credit and challenged financials. Nationwide Mortgage is a good option for loans in CA, FL, OR, VA, CO, WA. Citadel Servicing Corporation offers non-prime mortgages in many states.

100% Financing for Private and Hard Money Loans

Are you seeking 100% financing for a real estate investment purchase and finding that it’s not easy to find a lender for your deal? In this guide, we’ll explain why it’s so difficult to find, 2 alternatives to 100% financing, the typical pricing for private / hard money bridge loans, and how to find direct lenders that offer the highest leverage.

This guide is focused on Purchase Bridge Loans. If you’re a house flipper, check out our other guide that covers 100% Financing for Residential Fix & Flip Projects.

100% for Fix & Flip Deals

If you’re not rehabbing houses, continue reading to learn about 100% financing for an investment property purchase.

Hardly any private lending companies in the United States will consider 100% financing because it is extremely risky. If you don’t put any money into a deal, you have nothing to lose, and therefore, you may be more inclined to walk away from a property if things don’t work out as planned. This is the explanation we hear from most of the lenders in our network.

If you think the lender can just take back the property and make a profit, that is not reality. Foreclosure is a lender’s worst nightmare. Professional private lending companies are in business to lend money, not to own and manage properties.

Before we continue, we have to clarify that private mortgage lending is only for investment real estate. It’s not for buying a home that you’re planning to live in. There is one exception in California, and we’ll write another article to cover that.

Another item to clarify is the type of lender. The information in this guide is focused on  professional private lending companies, also known as hard money lenders or bridge lenders. We are not referring to private individual investors who lend out their own retirement funds.


100% Financing For Purchase Bridge Loans

The only way to get 100% financing for the purchase of an investment property which will not be significantly improved during the loan term, is with cross collateralization. This means you need to have another investment property with a sufficient amount of equity to use instead of cash.

If you do have another investment property to pledge as collateral, the lender would have a 1st position on the property being purchased, plus a 1st or 2nd mortgage on the property you already own (the “crossed” property).

If the crossed property is owned free-and-clear, meaning it doesn’t have an existing mortgage, you can use up to 70% of that property’s value for the purchase transaction.

Not all private lenders offer this, and it may take a bit longer to close because the lender now has to do their due diligence on a second property.

Not many lenders will consider a 2nd position mortgage, but the ones that do will likely have higher pricing. The interest rates for most 1st position private mortgages range from 7% to 12%, with the average being around 9% nationally. For a 2nd mortgage, the interest rates typically range from 10% to 15%.

If the crossed property will have a new 1st mortgage instead of a 2nd mortgage, the pricing would likely be the same as if you brought cash to the closing.

If you feel that this method of crossing another property being called “100% financing” is a bit deceiving, you’re not alone. However, this is how some lenders advertise that they offer 100% financing for a purchase bridge loan, and what they really mean is you can buy a property without a cash down payment.

Seller Financing Option for Higher Leverage

One other way to get higher leverage in purchase bridge loans is with a seller carry-back. This means the seller would provide a 2nd mortgage to fill the gap between the private lender’s maximum LTV and the purchase price.

While some private lenders are OK with this, they will not consider it when the borrower is not putting any of their own cash into the deal, so it’s not possible to get 100% financing with this scenario.

If a lender is willing to fund up to 70% of a purchase, they may be OK with you putting 10% down and the seller can finance the remaining 20% with a 2nd position mortgage.

For a residential property purchase, it will be nearly impossible to find a private lender willing to fund a 2nd mortgage for a purchase. This is commonly known as Gap Funding. We’ve known some companies that offered this in the past, but they went out of business or had to change their model because it resulted in too many foreclosures.

In commercial real estate financing, there are some private lenders that offer 2nd mortgages for a purchase. They call it “mezzanine financing” or “preferred equity.”

The minimum loan amount is typically one million dollars, and the property investor will need to contribute 10% to 15% percent of the purchase price in cash.

Buying Below Market Value

What if you’re getting a great deal off-market and buying way below the real value?

Most private lenders will not take this into consideration. In private mortgage lending, the purchase price is the value.

If you try to argue this with a private lender, their response will likely be that if they can fund 100% of the purchase price, they can just buy the property for themselves and be a real estate investor instead of a lender.

We see a lot of real estate investors using the perceived value amount when they state the loan-to-value to a lender. But if you’re buying a property and not adding any value to it during the loan term, a private lender will primarily focus on the purchase price, and many use the acronym LTP which is short for “loan-to-purchase price.”

If Not 100%, What’s the Maximum Loan-to-Purchase Price?

The max LTV for most short-term purchase bridge loans is 70%, and a small number of lenders will go up to 75%. If you’re buying vacant land, the maximum is 50% loan-to-value. Anything higher than that just doesn’t make sense for a private lender.

So to purchase an improved property, you’ll need a down payment of at least 30%, and for vacant land, the minimum down payment is 50%. If a lender is more conservative based on the property type, location or other factors, you’ll need a bigger down payment.

Some private lending companies offer long-term financing (5, 10 or 30 years) for residential rental properties. The max LTP for these loans can go up to 80% if you have good credit and the property is located in a primary market.

How to Find Lenders

You can find direct private/hard money lenders right here on our website, and we have a filter you can use to find the highest leverage.

  1. Start at the Find a Lender page
  2. Select one of these 4 Loan Types: Private Money, Hard Money, Commercial Bridge or Residential Bridge
    (Private Money & Hard Money will have similar results, and all lenders listed offer purchase bridge loans)
  3. Type in a state or major metro area, and click SEARCH
  4. Browse the list or click REFINE RESULTS in the Filters section
  5. Locate the field for LTP (Loan-to-Purchase)
  6. Type 100, and press Enter
  7. If you don’t see any results, type 95, 90, 85, and keep going down in increments of 5
  8. View each lender’s profile to learn about their guidelines, background and more
  9. Click the green CONTACT button and reach out to the lender directly

What’s the Difference Between a Private Lender and Hard Money Lender?

There are a number of opinions regarding the difference between a “private lender” and a “hard money lender”. In our opinion, they are the same – a non-institutional lender offering short-term mortgage loans to real estate investors. Our take on this comes from the perspective of being heavily integrated in the private lending industry. The majority of people who would disagree with our opinion are real estate investors (borrowers). This is what we hear from many real estate investors:

“A private lender is an individual investor who lends his/her own money and does not charge any points/origination fees. A hard money lender is a private lending company that charges points and may get their funds from investors.”

However, the lending companies which many real estate investors refer to as “hard money lenders” will commonly refer to themselves as a “private lender” or a “private money lender.”

Some private lending companies in our network do not like to be associated with the term “hard money” because they feel it has a bad connotation and makes them seem unprofessional or having extremely high pricing.

Private Lender Link does not list individual mortgage investors on our public directory. We only list private lending companies. Here are some of the benefits of doing business with a private lending company instead of an individual:

  • More Professional
  • More Reliable
  • Never runs out of money
  • Reputation
  • Legal Compliance
  • Easy to Find
  • Better Pricing

There are some benefits to borrowing from an individual investor:

  • May offer higher leverage
  • May consider a joint venture or equity position
  • Many don’t charge points (origination fees)

Private Lender Link does not list individual mortgage investors on our public directory. We only list private / hard money lending companies. It’s too difficult for us to vet individuals investors, and we can’t rely on them to deactivate their listing when they run out of funds to lend.