In general, institutional lenders have lower interest rates and higher closing costs, while private lenders have higher interest rates and lower closing costs.
The difference in interest rate is attributed to the amount of risk the lender is taking; institutional lenders operate within a system that has multiple safety nets for them to recuperate their money if the borrower doesn’t pay. Some of their safety nets are built into their borrowing conditions, which is why they typically loan only 65% to 75% of the property’s appraised as-is value. Another common loan clause that acts as a safety net for institutional lenders is a prepayment penalty, which is a fee you have to pay if you pay off the loan early.
Another difference in real estate investment loan terms of institutional lenders and private lenders is the fees. Institutional lenders are the cause of tons of additional closing costs because they have so many requirements, so even though appraisal fees, survey fees, inspection fees, and attorney fees don’t technically go into the lender’s pocket, those services are all required by the lender. But more important is the “junk fees” that most institutional lenders charge at closing. Junk fees are sometimes easy to recognize by their vague labels on your closing statement, ensuring that you have very little idea of what you’re actually paying for. Your closing statement might list junk fees as application fees, credit fees, administrative fees, rate lock fees, processing fees, underwriting fees, and so on.
So now you know a lot about the most common terms of a real estate investment loan from an institutional lender, but you may feel like you’re still in the dark about private lender loan terms, and that’s because there is no “average” or “standard” for private lenders. When it comes to the terms of a loan from a private lender, anything goes! Flexibility, leverage, and risk are elements that private lenders wield with as much or as little discretion as they choose, and every hard money lender is different. If they wanted to, private lenders could have completely different loan terms for every investment property they lend on!
With that being said, it’s fair to say that most private lenders don’t require appraisals, inspections, or surveys, and most private lenders don’t have junk fees. Some private lenders may base their maximum loan amount on the current as-is value of the property, but most base it on values and figures that are more relevant to the investment itself, such as rehabbed value, completed value, rehab cost, infrastructure cost, and so on. Some private lenders have a prepayment penalty clause in place, while others don’t. Most private hard money loan payments are interest-only, but the time frame allowed for repayment varies wildly from lender to lender, and many lenders will even shorten or lengthen the repayment term depending on the borrower and the project.