Private Money Loans Provide a Short-Term Funding Alternative
Private money loans are offered by private lenders instead of traditional financing sources such as banks, lending institutions, or government agencies.
They usually are short-term (3 months to 12 months) hard money or asset-based loans (is another terminology for them), and the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower’s credit rating however, the borrower needs to show loan servicing or provided a plausible exit strategy to pay back the loan before expiry period.
Private money loans are a source of funding for professional business investors who wish to acquire, refinance, or cash out the equity of income-producing residential or commercial property, and for those who otherwise would not be suitable for conventional lending.
Private money loans also assist real estate investors who need immediate financing without the financial documentation required by traditional institutional banks.
Private money loans are very secure because they represent a maximum of 65 % to 75 % of the real estate agent appraised the value of the security being offered by the borrower.
Why Borrow Private Money?
When interest rates of 8% to 12% depending on security, location and risk for the private lender are added to an additional 4 or 5%, the borrower is paying close to 16 % annually for a private money loan. This is a good deal for private money lenders, but why would borrowers want to pay these high rates when standard bank mortgages range between 4% and 6%?
Many reasons are, but all fall into four groups.
- The speed of Closing. Bank loans usually take between 45 days and 60 days to fund, since institutional lenders need to obtain an appraisal of the property`s value, perform a detailed examination of the borrower`s credit history, and thoroughly evaluate the borrower`s current financial status.
On the other hand, private mortgage lenders usually can complete a transaction within seven to 10 days. Since the property itself is the main criteria used to determine loan eligibility, less information on the borrower is required, resulting in a much quicker approval process.
Further, the private money lender can make a decision within 24 hours of receiving information, whereas institutional mortgage money must be approved by a loan credit specialist which can take up to 10 working days if they have a backlog of deals in their pipeline.
- Easy Application Process. While a borrower`s lack of up-to-date personal financial information would counteract or at least delay approval for a bank mortgage, it should have no effect on the ability to obtain a private money loan. Private money lenders generally base their decisions on the asset used for collateral — the property that is being offered.
If the property value is high enough and the income being generated is sufficient to pay the interest on the debt, the borrower`s personal financial situation should not affect the private money lender`s decision.
- Other Money Resources Are Not Available. A borrower may not qualify for a traditional bank loan for reasons ranging from low borrower credit scores or too much borrower debt.
Many institutional lenders will not loan amounts under $50,000 and will not lend second mortgage money or caveat loans even if there is significant equity in the property.
In these cases, private mortgage lenders may be the only available resource. Apply here for a private mortgage enquiry.
- More Funds Available. Since private money lenders base their loans on the appraised value of the property, the borrower may be able to borrow more and therefore have less of its own capital invested in the property.
The most important parameter private money lenders consider when assessing a loan request is a loan to value ratio (LVR). They typically will lend up to 50 % on land or an undeveloped property; 70% to 75 % on commercial property such as office buildings, shopping centres, and warehouses; and up to 80% on residential property
A major assessment consideration the private money lender must reflect is an exit strategy, or how the borrower plans to repay their loan within the approved loan term. Since most private money loans are short-term, private money lenders have a keen interest in analysing whether a particular exit strategy is viable. The higher the risk the high the annual rate, the lower the risk the lower the annual rate offered to the borrower.