January 17, 2025

Private Lender vs. Bank Mortgage Lending: Which Option is Right for You

When you're ready to buy a home in Philadelphia, mortgage options and rates are likely to be key factors in determining home affordability. One of the biggest mistakes you can make as a homebuyer is ignoring the available options and not doing the necessary research. There’s no "one-size-fits-all" when it comes to lenders—each one offers different terms, and every bank has its own approach!

Both private lenders and banks have their pros and cons, and understanding the differences between them can help you make a more informed decision—whether that means securing a better rate, obtaining a more suitable grant, or getting faster service. If you already own a home and are thinking of selling, it’s also important to consider the type of mortgage potential buyers may have to ensure a smoother transaction. In this article, we’ll compare private lenders and banks based on several key factors, including published rates, loan requirements, the approval process, negotiation flexibility, loan solutions, timing, and more. By the end, you’ll have a clearer idea of which option is the best fit for your goals.

***We’ve aimed to present the bigger picture to help you make a more informed decision. Since this article is a bit long, feel free to scroll down for a summary and some valuable resources.

What is the Difference Between a Private Lender and a Bank?

A private lender is usually a non-bank financial institution or an individual investor who lends money to borrowers. They tend to have more flexibility and a faster approval process compared to traditional banks, but their interest rates can be higher.

A bank is a traditional financial institution that offers a wide range of financial services, including mortgage lending. Banks are more heavily regulated, which often results in lower interest rates compared to private lenders. However, they can be stricter in their approval processes and involve more layers of bureaucracy.
What is the Difference Between a Private Lender and a Bank?

Differences in Published Rates

Rates can vary widely depending on whether you're working with a private lender or a bank. Here's a general breakdown:

Private Lenders:

Interest rates with private lenders are generally higher, especially for borrowers with less-than-perfect credit or for specialized loans like hard money loans. Rates can range from 7% to 12% or higher, depending on your financial profile and the type of loan. However, one of the advantages of working with a private lender is that rates may be negotiable!

Banks:

Banks typically offer more competitive interest rates, especially for borrowers with strong credit. In 2025, average fixed-rate mortgage rates from major banks in Philadelphia range from 5% to 8% for a 30-year loan. These rates can fluctuate based on market conditions, the borrower’s credit score, and the type of loan.

Requirements to Get a Mortgage

Private Lenders:

Private lenders often have more flexible requirements for mortgage application. Just like a real estate agents private lenders business depends on peoples feedback and referrals, so it fair to say that they care more about outcome. They are willing to work with borrowers who may not meet the strict guidelines of traditional banks. Requirements can vary, but in general, private lenders may look at:

Property value and equity
The borrower's ability to repay, sometimes based on the "hard asset" (the property itself)
The borrower's credit score and history (though they may not be as strict)….

Banks:

Banks are more likely to require a higher credit score (typically 640 or higher) and a stable income history. Banks will also require a thorough review of your financial documents, such as:

Proof of income (pay stubs, tax returns)
Credit report
Employment history
Debt-to-income (DTI) ratio…

The Overall Process of Getting Approved

Private Lenders:

The approval process with private lenders is generally faster. Because private lenders aren't as bound by strict regulations, they can make quicker decisions.
Approval time could range from a few days to a week, especially for borrowers seeking non-traditional loans like hard money loans.
One drawback, however, is that the process may not be as transparent. Private lenders tend to have less rigid guidelines, which could make it harder to understand exactly why you're approved or denied.

Banks:
The approval process with a bank is typically more formal and thorough. It could take anywhere from 3 to 6 weeks to get approved and close on a loan.
Banks will ask for a lot of documentation, and their review process is often more structured and predictable. However, it can feel slower, and rejection rates can be higher for those with lower credit scores or high debt-to-income ratios.

Negotiation Flexibility

Private Lenders:

One of the biggest advantages of using a private lender is flexibility. You may be able to negotiate the terms of the loan, including the interest rate, repayment period, and even the down payment.
Private lenders are more likely to be open to customizing loans for non-traditional borrowers, self-employed individuals, or people with credit challenges.

Banks:
Banks are generally less flexible when it comes to negotiating loan terms. They operate within strict regulatory guidelines and are less likely to deviate from standard loan products.
However, if you have excellent credit and a strong financial profile, you may be able to get a better deal on interest rates or fees through certain bank programs.

Grant Options in Philadelphia County:

If you're purchasing a home in Philadelphia, both private lenders and banks offer various grant and financial assistance programs to help make homeownership more affordable. Here’s a breakdown:

Private Lenders:

Private lenders may offer grants or loan incentives, typically ranging from $10,000 to $25,000, to assist with down payments and closing costs. These programs can vary by lender and location, but they are often aimed at first-time homebuyers or individuals in specific income brackets.
Banks:
Banks often provide larger grants—some up to $50,000—depending on your eligibility and financial situation. These grants may come with additional benefits, such as incentives for using the bank’s mortgage products or for participating in community development initiatives.

Many state and local grants, such as those offered by the Pennsylvania Housing Finance Agency (PHFA), are available through both approved banks and private lenders. PHFA programs provide down payment and closing cost assistance for low- to moderate-income buyers across Pennsylvania. Whether you're working with a private lender or a bank, these financial support options can significantly reduce your upfront costs and help make your dream home a reality.

Conclusion: Private Lender vs. Bank Lending

If you're looking for fast approval, flexible requirements, and a more personalized approach to unique financial situations, a private lender may be your best choice. Private lenders often provide a more hands-on experience—since their business thrives on referrals, they’re motivated to work with you closely. They’re more likely to answer calls on weekends and take the time to explain the finer details of your mortgage.

However, if you have a strong credit score, can afford a larger down payment, and are comfortable going through a more formal approval process, a bank mortgage might save you money in the long run with lower rates and better loan terms.

No matter which option you choose, make sure to do your research, compare multiple lenders, and consult with a mortgage professional to ensure you’re getting the best deal for your unique needs.

Helpful Resources:

Philadelphia Home Purchase Assistance Program (HPAP) – Link to HPAP Details
Pennsylvania Housing Finance Agency (PHFA) – PHFA Mortgage Programs
Consumer Financial Protection Bureau (CFPB) – Mortgage Resources

Ask Our Trusted Partners:

Mike Tavani from Rate: Contact Mike Tavani
Paul Davis from Movement: Contact Paul Davis
Al Bucchi from Crown Mortgage: Contact Al Bucchi

Good luck with your home-buying journey! Whether you go with a private lender or a bank, it’s important to understand your options and choose the one that fits your financial situation best.

Ready to explore your options?