A private money loan is a short-term, asset-based loan secured by real estate and funded by a private lender, not a bank. Unlike a bank, a private lender qualifies the deal on the property’s value and your exit, not your W-2 or DTI. For California real estate investors, that distinction matters every time a distressed property hits the market, an auction requires same-day funding, or a bank declines a deal that pencils out on paper. This guide covers how these types of deals are structured, what they cost, where they’re used, and how to decide when one makes sense for your deal.
Key Takeaways
- Private money loans are asset-based: the property and exit strategy qualify the deal, not the borrower’s income.
- Rates run 9-15% with 2-4 origination points; terms are 6-24 months with a balloon payment at maturity.
- Private lenders fund fix-and-flip, BRRRR, commercial, bridge, new construction, and second mortgage transactions.
- Credit affects rate tier and leverage, not approval. Most lenders accept 600+.
- Closings run 7-14 days versus 30-60 days for a conventional mortgage.
- No documented exit strategy means no loan.
How Does a Private Money Loan Work?
A private money loan is underwritten on the asset, not the borrower’s financial profile. The lender orders a property valuation, reviews the exit strategy, and structures the loan against the collateral. Because every decision turns on property value rather than tax returns, private lenders fund deals in days.
Loan Amount: LTV and ARV
LTV (loan-to-value) measures the loan as a percentage of current market value. Most private lenders cap LTV at 60-75%. A $500,000 property at 70% LTV supports a $350,000 loan.
ARV (after-repair value) is used on fix-and-flip deals. The lender can fund up to 70-75% of ARV, and valuations come from a licensed appraisal or a broker price opinion (BPO). A BPO is faster; an appraisal carries more weight on larger commercial deals.
Repayment: Interest-Only and Balloon
Most private money loans are interest-only with a balloon at maturity. On a $400,000 loan at 11%, the monthly payment is $3,667. The full $400,000 is due at loan end. This structure keeps cash flow low during a rehab or lease-up period. If the balloon comes due before the exit lands — the sale falls through or the refinance is delayed — the borrower must negotiate an extension with the lender or risk default.
Exit Strategy
An exit strategy is the documented plan for repaying the loan at maturity. The three standard exits are: sale of the property, refinance into long-term financing such as DSCR loans, and sale of a separate asset. No documented exit means no loan.
Private Money Loan Rates, Points, and Down Payments
Private money loan rates in 2026 run 9-12% for first-position loans and 12-14% for second-position loans — second position is priced higher because it carries more risk for the lender — compared to roughly 6-7% for conventional investment mortgages. Six factors price a specific loan: LTV ratio, property type and condition, borrower experience, loan position, market and state, and term length.
Points run 2-4% of the loan amount at closing. On a $300,000 loan with 3 points, that is $9,000 upfront. It’s recommended to compare loans on APR and not a headline rate, because a lower rate with more points often costs more over a 12-month term.
Down payments typically run 10-30%. True 100% financing is rare and reserved for experienced borrowers with strong ARV margins.
What Are Private Money Loans Used For?
Private money loans fund six primary transaction types: fix-and-flip, BRRRR rentals, commercial real estate loans in California, new construction, bridge financing, and second mortgages.
Fix-and-flip is the most common use. The lender funds purchase and rehab in a single loan with draw-based releases. Private lenders close in 7-14 days versus 45-60 for a bank. Speed wins contracts.
BRRRR (Buy, Rehab, Rent, Refinance, Repeat) uses private money to acquire and renovate a distressed property, then refinances into a long-term loan after stabilization. Banks won’t lend on non-conforming properties at acquisition.
Commercial real estate loans run $500,000 to $20 million across mixed-use, multifamily, retail, light industrial, and hospitality assets. The typical use case is value-add acquisition: the property doesn’t yet cash-flow enough for permanent financing. On commercial deals, understanding recourse vs non-recourse commercial loans before signing matters.
New construction loans fund land and construction costs in draws, capped at 65-70% of ARV. Banks require pre-sales; private lenders generally don’t.
Bridge loans span a gap between two financial events. Second mortgages are junior liens used to pull equity from a stabilized asset, typically at 12-15% for 12 months or less.
Private money loans cannot be used for a primary residence. Dodd-Frank ATR rules apply to owner-occupied loans and private lenders structure their programs to avoid that market.
Private Money Loan Requirements
Private lenders qualify the asset and the exit. Credit score affects rate and leverage, not approval. A 740 FICO might get 12% at 75% LTV. A 740 FICO on the same deal might get 14% at 65% LTV. Some lenders have no minimum.
Borrowers with bad credit can qualify with a higher rate (+2-3%), lower leverage (60-65% LTV), larger down payment, and a strong exit. Verify state licensing before engaging — California requires it.
Documentation is lean: purchase contract, scope of work and rehab budget, proof of funds, LLC docs, insurance binder, and ID. A complete package takes 24-48 hours to assemble, compared to weeks for a bank mortgage.
Experience affects pricing. First-timers pay 1-2% more and bring 5-10% more cash to closing. Investors with 10 or more completed deals qualify for preferred rate tiers.
How Is a Private Money Loan Different From Other Financing?
| Attribute | Private Money | Soft Money | Traditional Mortgage | Bridge (Bank) | HELOC |
|---|---|---|---|---|---|
| Approval basis | Asset + exit | Asset + partial borrower | Full borrower profile | Borrower + asset | Primary residence equity |
| Typical rate | 9-15% | 6-9% | 6-7% | 6-10% | 8-10% |
| Typical term | 6-24 months | 1-30 years | 15-30 years | 6-18 months | 10-year draw |
| Speed to close | 7-14 days | 2-4 weeks | 30-60 days | 3-6 weeks | 2-4 weeks |
Private money wins on speed and access for non-W-2 borrowers. Conventional wins on cost and term for investors who can document income and afford the timeline.
Pros and Cons of Private Money Loans
Advantages: 7-14 day close, asset-based approval, flexible per-deal structure, single loan for property and rehab, no prepayment penalties on most loans, and access for self-employed and non-W-2 borrowers.
Disadvantages: Rates of 9-15% vs 6-7% conventional (on a $500,000 loan held 12 months, that gap is $25,000 in additional interest), 2-4 origination points, balloon pressure at 6-24 months, 10-30% down payment, faster foreclosure on default, and no Dodd-Frank consumer protections.
Is a Private Money Loan Right for You?
Use private money when: speed wins the contract, the property is distressed or non-conforming at acquisition, the borrower lacks W-2 income, a short-term bridge is needed, or the seller requires a fast close.
Avoid it when: the hold is long-term with no refinance plan, the property is a primary residence, you have strong W-2 income and 45 days to close, there is no documented exit, margins are thin, or you are a first-timer with no contingency reserve.
Alternatives to a Private Money Loan
Not every deal requires private money. Depending on the property, the borrower’s profile, and the timeline, one of the following alternatives may cost less or fit better.
DSCR Loan — A debt-service coverage ratio loan qualifies on rental income rather than the borrower’s personal income. It beats private money when the property already cash-flows at acquisition, the investor wants a 30-year fixed rate, and there is no urgency to close in under two weeks. Rates typically run 7-9%, with no balloon.
Conventional Investment Mortgage — A standard investment property loan through a bank or agency lender. Rates run 6-7% with 30-year terms. It beats private money when the borrower has documented W-2 income, strong credit, and 30-60 days to close on a move-in-ready property.
Home Equity Line of Credit (HELOC) — A revolving line of credit secured by equity in an existing property. Rates run 8-10%. It beats private money when the borrower owns a stabilized asset with substantial equity, needs flexible draw access, and is not in a time-critical purchase situation.
Bank Bridge Loan — A short-term loan from a commercial bank bridging two financial events. Rates run 6-10%. It beats private money when the borrower has a strong financial profile, the property is in good condition, and a 3-6 week close is acceptable.
Hard Money from a Non-Institutional Lender — Similar to private money in structure but sourced from individual investors rather than a lending company. Can be faster to negotiate but terms vary widely and are less standardized. Worth exploring when a relationship with a direct investor exists.
The difference between a funded deal and a missed one often comes down to how fast your capital moves. California’s investment market doesn’t wait on bank timelines, and a property in distress won’t qualify for conventional financing until the work is done. Getting the loan structure right before you’re under contract pressure is what separates investors who close from investors who watch deals go to someone else.
At Fidelity Mortgage Lenders, we’ve been originating private money loans across California since 1971, with a focus on closing fast on the deals banks decline. Contact us to apply for a private money loan today.
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