Everything You Need To Know About Getting Started With Hard Money Loans
What is a Private money Loan?
A private money loan is simply a short-term loan secured by real estate. They are funded by private investors (or a fund of investors) as opposed to conventional lenders such as banks or credit unions. The terms are usually around 12 months, but the loan term can be extended to longer terms of 2-5 years. The loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term.
The amount the private money lenders are able to lend to the borrower is primarily based on the value of the subject property. The property may be one the borrower already owns and wishes to use as collateral or it may be the property the borrower is acquiring.
Private money lenders are primarily concerned with the property’s value rather than the borrower’s credit (although credit is still of some importance to the lender). Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a private money loan if they have sufficient equity in the property that is being used as collateral. When the banks say “No”, the private money lenders can still say “Yes”.
Property Types for Private money Loans
A borrower can get a private money loan on almost any type of property – including single-family residential, multi-family residential, commercial, land, and industrial.
Some private money lenders may specialize in one specific property type such as residential and not be able to do land loans, simply because they have no experience in this area. Most private money lenders have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do.
Many private money lenders will not lend on owner-occupied residential properties due to the extra rules and regulations (thanks Dodd-Frank!) but there are those who are willing to wade through the paperwork with the borrower. All private money lenders will do loans in 1st position, while fewer will do 2nd position due to the increased risk for the lender.
What Types of Deals Should Private money Loans Be Used For?
Private money loans are not appropriate for all deals. When purchasing a primary residence with good credit, income history, and there are no issues such as a short sale or foreclosure, conventional financing through a bank is the best way to go if the borrower still has time to go through the lengthy approval process required by a bank. Private money is your source of financing when banks are not an option or the loan is needed in a short period of time.
Private money loans are ideal for situations such as:
- Fix and Flips
- Land Loans
- Construction Loans
- When the Buyer has credit issues.
- When a real estate investor needs to act quickly.
Who Should Use a Private money Loan?
Real estate investors choose to use private money for many different reasons. The main reason is the ability of the private money lender to fund the loan quickly. In most situations, private money loans can be funded within a week. Compare that to the 30 – 45 days it takes to get a bank loan funded. The application process for a private money loan generally takes a day or two and in some cases, a loan can be approved the same day. Good luck hearing back about a loan approval from your bank within the same week!
The ability to obtain funding at a much faster rate than a bank loan is a significant advantage for a real estate investor. Especially when the real estate investor is trying to acquire a property with many competing bids, a quick close with a private money loan will get a seller’s attention and set their offer apart from the rest of the buyers offering slow conventional financing.
Another reason a borrower may choose to use a private money loan is that they have been rejected by the banks for a conventional loan. Life doesn’t always go as planned. Short sales, foreclosures, credit issues… they happen. Another important thing banks need to see is income history. If a potential borrower recently started a new job, the bank may deny the loan request due to insufficient income history, even if the borrower makes a healthy income. Private money lenders are able to look past these issues as long the loan be repaid and the borrower has enough equity invested in the property.
Interest Rates and Points for Private money Loans
The interest rates and points charged by private money lenders will vary from lender to lender and will also vary from region to region.
Private money lenders take on more risk with their loans compared to a conventional bank loan. Due to this higher risk involved on a private money loan, the interest rates for a private money loan will be higher than conventional loans. Interest rates for private money loans range from 10 – 15% depending on the specific lender and the perceived risk of the loan. Points can range anywhere from 2 – 4% of the total amount loaned. The interest rates and points may vary greatly depending on the loan to value ratio.
Private money Loan to Value Ratios
The loan amount the private money lender is able to lend is determined by the ratio of loan amount divided by the value of a property. This is known as the loan to value (LTV). Many private money lenders will lend up to 65 – 75% of the current value of the property. Some lenders will lend based on the after repair value (ARV) which is the estimated value of the property after the borrower has improved the property. This creates a riskier loan from the private money lender’s perspective because the amount of capital put in by the lender increases and the amount of capital invested by the borrower decreases. This increased risk will cause the private money lender to charge a higher interest rate.
Borrower Requirements for Private money Loans
As discussed earlier, private money lenders are primarily concerned with the amount of equity the borrower has invested in the property that will be used as collateral. They are less concerned with the borrower’s credit rating. Issues on a borrower’s record such as a foreclosure or short sale can be overlooked if the borrower has the capital to pay the interest on the loan.
The private money lender must also consider the borrower’s plan for the property. The borrower must present a reasonable plan that shows how they intend to ultimately pay off the loan. Usually, this is improving the property and selling it or obtaining long-term financing later on.
What does our company do?
As private money brokers we utilize our network of lenders, equity firms, and investors to find you, our client, the best loan terms available.
Contact us today at 1-833-833-4382 or 1-904-330-1026 to see how we can help you.