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How Do I Qualify for a Private Money Loan
What is a private money loan? What is the difference between a private money and hard money loan? How Do I Qualify for a Private Money Loan? What is the eligibility requirements to qualify and get approved for a private money loan? What is better? Private money loans or hard money loans? Where can I get approved for private money loans fast?
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Gustan.
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What is a Private Money Loan?
The term private money loan refers to any real estate financing that banks or traditional financial institutions do not regulate. Real estate investors use private money loans on investment and commercial properties. Individuals or companies use hard money loans vs. traditional loans. This is because private money loans do not require income documents or tax returns and can close in a few days to a few weeks. Private money loans are often used in real estate investments such as rental properties, fix-and-flip projects, and short-term funding needs. Private money lenders do not evaluate the borrower’s creditworthiness. Lenders of private money loans base their decisions on purchased or refinanced property.
Difference Between Private Money and Hard Money Loans
Source of Funds:
Individual investors or private companies frequently fund Private Money Loans. Terms on private money loans vary widely depending on each lender’s preference. Hard Money Loans are usually funded by groups of investors or through hard money lending companies. Therefore, hard money loans tend to be more structured than private loans and may have stricter terms.
Flexibility:
Private Money Loans: Interest rates, repayment schedules, and approval criteria can be flexible with private money lenders. This makes private money loans good when you have unique deals because terms are usually negotiated on a case-by-case basis. Hard Money Loans need to be more flexible. Hard money loans have more standardized terms and conditions. They are usually short-term, with higher interest rates and stricter repayment schedules.
Interest Rates and Fees:
Private Money Loans: How high or low an interest rate should be charged for private money loans depends on the risk involved in the deal and what the lender requires. Expect slightly lower rates than hard money loans if you have good relations with your lender.
Hard Money Loans: As high-risk investment points themselves, upfront fees attract higher percentages, while interest rates range between eight percent (8%) and fifteen percent (15%) per annum, or even above, depending on various factors surrounding the transaction, like duration, among others. Thus, they are costlier alternatives than their so-called counterparts, private funds lending facilities.
How to Qualify for a Private Money Loan
Property Value: The main determinant of whether or not you will qualify for private money financing is the value of your property, which serves as collateral. Lenders care less about your credit score but rather look at how much can be earned from this land as rental units or what its chances are when resold after fixing it up.
Loan-to-Value (LTV) Ratio: Many private money lenders may require a low loan-to-value ratio ranging between sixty percent (60%) and seventy-five percent (75%). This means the borrower’s part should have a significant amount of equity or down payment.
Exit Strategy: Selling the property, refinancing it, or generating rental income, among other ways, must be used to repay this borrowed capital. Therefore, one must have an appropriate exit plan before applying for these funds.
Experience: Investing in real estate before could increase your chances of getting approved for such loans since credibility is key here. For instance, someone with many successful projects as an investor stands a better chance than another person who has never invested.
Eligibility Requirements for Private Money Loans:
Collateral:
The only primary collateral is still supposed to be the property itself. The lender must consider its worthiness and potential.
Down Payment: Many, if not most, private money loan deals require substantial equity participation at inception through large down payments. A large down payment shows that the applicant has skin in the game and is serious about meeting various obligations.
Credit Score: Though it may carry little weight during the evaluation process, fair ratings can help. This is especially true when dealing with new entrants in the real estate sector.
Proof of Funds: This means showing that one has enough money. Everything should be covered, from the deposit amount required up to repairs or renovations planned for
Experience: Depending on the circumstances of flipping houses, it can enhance the chances of approval because it reflects the capability of handling such transactions cautiously.
Is It Better To Borrow From A Private Or Hard Money Lender?
Private Money Loans are best if you have a history with the lender or need flexibility with terms. These are often very customizable loans and can come at lower rates (if you negotiate well).
Hard Money Loans:
Hard money loans are for quick cash… like right now! You need funds ASAP because you don’t have time to play around with banks or haggle over rates and terms.
In summary, it depends on what you’re looking for. Private money loans work great for investors who have relationships with private lenders who want flexible terms. In contrast, hard money might be best suited for someone looking to get in and out quickly (flip) or have only one option once they can secure conventional financing.
Where Can I Get Approved For A Private Money Loan Fast?
Local REIAs (real estate investor clubs): These groups serve as a meeting place for local investors who want to buy and sell real estate. There are usually many more “off-market” transactions happening here than at the MLS.
Online lending platforms: These websites connect borrowers needing rehab loans and private mortgages with investors who have the capital to fund them. They specialize in short-term lending for investment properties, although many also offer transactional funding for wholesale deals.
Mortgage brokers: If you work directly with a mortgage broker (different from going through a bank), they may know some local private lenders willing to fund your deal(s). Mortgage brokers do not lend themselves but work with multiple lenders to find the best loan programs for their clients (aka YOU).
Private Individuals/Investors: Sometimes, they will keep their friends and family informed about their business ideas. They think they know how it will end… So why not ask Uncle Bob if he wants to invest $100k into your real estate business? No, but seriously, if you have a relationship with someone who has money—and they believe in what you’re doing—then why not?
Final Thoughts:
Hard money and private loans are great (and necessary) tools for real estate investors. Understanding the difference between the two, how to qualify, and selecting the right lender(s) for your deals will greatly increase your chances of success in this (or any) business. Gustan Cho and Nelson Thompson are full-service business, commercial, residential, and mortgage brokers and lenders of alternative financing options. Lending Network, Inc. is the business, alternative funding, and commercial lending division of Gustan Cho Associates. Lending Network offers private and hard money loans in all 50 states. If you have questions about private money loans or need private or hard money financing, please contact us at Lending Network, Inc. at gcho@gustancho.com or nelson@gustancho.com. The team at Lending Network is available seven days a week, including evenings, weekends, and holidays.
If anything above needs clarification – or if there’s something else you’d like to know – please ask! Visit our website at Lending Network, Inc. at https://www.lendingnetwork.org
