How does a private money loan work?
- The borrower provides the lender with the requested documentation for underwriting.
- An appraisal or inspection of the property will take place. Some private money lenders conduct the inspection themselves, while others require an appraisal.
- The title company issues an acceptable title report, loan documents are drawn, and then the loan is closed.
- When the borrower can once again qualify for conventional financing, they will refinance with a conventional lender. In situations where the borrower is a real estate investor, they would sell the subject property to cash in their investment and pay off their loan.
Who uses private money loans?
- Renters: Those who do not meet the stringent requirements of conventional lenders, and want to become homeowners use private money loans. Depending on the lender, loan payments on a private money loan (with monthly impounds for taxes and insurance) can be less than paying rent.
- Commercial property owners: Today’s lending environment has made it difficult to obtain financing for commercial real estate. A good private money lender is able to provide lending solutions to buyers of commercial real estate.
- Investors: Real estate investors that need to quickly close on an investment opportunity use private money loans. Conventional lenders cannot always close a loan quickly enough for real estate investors to capitalize on a good purchase.
- Builders: Those that own their lots free and clear use private money financing to complete their construction projects.
Private money lenders also finance unwarrantable condos and townhouses.
What are the requirements?
Underwriting a private money loan is primarily based on the borrower’s equity in the property. Private money lenders will typically loan a maximum of 65% of the current market value of the subject property. Underwriters are less concerned with a borrower’s credit scores and give more consideration to the borrower’s ability to repay the loan. If you or your client does not meet the stringent qualifications of the conventional mortgage lenders, private money is a viable solution.