Private money lending, as the name implies, means borrowing money from an individual investor. Real estate investors use private lenders to finance deals that either won’t qualify for a traditional loan or can’t wait the usual 30 days or so that a conventional mortgage loan needs for approval.
Key Facts of Private Money
Private Lender Loans are different than traditional loans from big banks, and the process of obtaining one will be different as well.
- Speed of Purchase: On average, a private lender can underwrite and fund a loan in as little as 4-21 days. Banks can take up to 90 days to accomplish the same thing. The timeframe offered by a private money lender is, more or less, conducive to the deals a typical investor wants to finance.
- Asset-based Lending: A Lender is primarily driven by the underlying value of the subject property. Therefore, a borrower does not need to rely on their credit to secure a loan.
- Control & Profitability: Borrowers receiving private money have more control over their loan. Borrowers of private money do not need to take on equity partners.
- Shorter Term Loans: These Loans typically have a shorter loan period than those of a conventional nature, which reduces the risk of accruing late penalties.
- Guarantee of Capital: Allows borrowers, independent investors in particular, to expand their business. A predictable source of funds is necessary for such an endeavor.
Deal Viability:
Private lenders are in the business of making money. Therefore, mitigating risk is a top priority. There are essentially eight factors to consider when deciding whether or not a potential loan opportunity is viable. They are as follows:
- Market Value
- Borrower Credit
- Borrower Equity
- Additional Collateral
- Lien Priority
- Pricing Strategy
- Exit Strategy
- Due Diligence
Each of these factors must be taken into consideration when determining whether or not to pursue a loan opportunity. Failure to mind due diligence and neglect either one of these could result in harsh consequences. That is why Gold Bridge Capital Solutions have specialized in the market of Private money and does the hard work for you.
What are the advantages of Private Money?
Private loans are particularly ideal for investors who want to buy a property that needs a lot of repairs. Conventional financial institutions often refuse to grant mortgage loans for properties that have been vandalized or seriously damaged in some way. Private investors, on the other hand, see the potential in a property that can be purchased cheaply, fixed for a reasonable price and then resold for a tidy profit.
Additionally, a private money lender will have fewer requirements than other lenders. More specifically, private investors focus on the potential profitability of the real estate purchase rather than the borrower’s financial history and credit score. Furthermore, private money loans can be granted relatively fast, whereas a loan from a conventional lender may not be approved for up to 45 days.
What are the Disadvantages of Private Money?
There are a few disadvantages to obtaining private loans. The first is that private lenders most often charge a higher interest rate than the average bank loan. The standard interest rate for private loans is 7 to 12%. However, you may be required to pay a down payment to 20% or higher. This is particularly true if you have poor credit and/or the purchase of the property is risky in some way. Lenders also add “points” to the loan, creating an additional expense for borrowers to cover.
Another disadvantage is that, unlike with banks, raising private money won’t allow you to pay off a loan over a 30-year period. You can expect to be required to pay the loan back within 6 to 60 months. Although some more-lenient lenders, especially those you may be related to, may give you a couple of years.
One more thing to keep in mind: you will most likely have to use the property as collateral for the money financed from a private money lender. This means doing your due diligence to ensure a deal’s framework (and potential) meets your criteria.
Private money is a great way for investors to supplement their income if they are unable to fully fund a deal with the help of traditional loans or available cash funds. Private lenders are willing to give loans to investors who are able to present the profitability of the deal they are investing in. If you need more information about Private Money Lending. Contact Gold Bridge Capital Solutions for your specialists in Private Lending.
Frequently Asked Questions:
How does a private money lender work?
Private money lenders make money the same way that a traditional lender like a bank or credit union does, with fees generated from loan originations and interest payments on the funds borrowed. However, instead of serving as a middleman the way a mortgage broker does, a private lender works directly with a borrower
What is private money funding?
Private money investing is the reverse side of hard money lending, a type of financing in which a borrower receives funds based on the value of real estate owned by the borrower
How do I qualify for a private loan?
New investors may also need a higher credit score to qualify on their first attempt for financing. To get funded with a private money loan, borrowers will need to submit additional documentation, including proof of past experience, or licensed contractor bids.
How long do you have to pay back a private lender?
The terms usually run for around 12 months. Although, the loan term can be extended from 2-5 years.
Are private lenders safe?
Rates charged are risk-based, and private loans are often risky. Any borrower dealing with a private lender is usually doing so because they have exhausted all other options.
How much money can you get from a private lender?
As a rule of thumb, most private lender’s I know will lend at 65% of the property/project value or less, although some will venture up to 70%
How much interest does a private lender charge?
Generally speaking, private lenders will charge between 7-12%, but this depends on the purpose of the loan, the length of the loan, and the relationship between the borrower and the lender.
How fast can a private lender close?
Typically anywhere between 4-25 days. Each loan is unique and loan closings will vary between each private lender.
What is the difference between hard money and private money?
Private money lenders typically are not organized money lenders and are not usually licensed to loan money. Hard money lenders, on the other hand, are organized money lenders and are usually in some way licensed to loan money. Hard money lenders typically have lending criteria. You can also read more on the differences HERE >
Is there a down payment for Private Loans?
Typically private lenders will want you to have at least 20% down.
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Gold Bridge Capital Solutions
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