Real Estate

The comprehensive guide for buying private money loans

3/21/2020 Lokesh kumar 0 Comments

Most of the private money lenders are non -institutionalized lenders. They mostly issue short term loans usually for the purchase and renovation of an investment property. Private money lenders offer money as short term and even as long term investors for the rehabilitation project, quick funding or cash-out refinancing. They offer competitive rates for prime borrowers with no prepayments and penalties.

How do private money lenders work?

Typically they offer loans that are secured by real estate assets. These loans will be used to purchase a house, condo, or multifamily building.  Private lenders can be anyone. It includes a well-established company and even a friend or family member who gives us money and supports us to come under this cover.

But it is usual for anyone to relate the term "private money lenders" who offers loans as short term real estate loans that are used to renovate and purchase an investment property. However, hard money loans are useful for both the small investors as well as long term investors who concentrate on buying and holding.

There are 3 kinds of private investors.  In all these 3 kinds, there is a relationship between the borrower and the lender. It is as follows. 

 Family and Friends
Colleagues, professionals, personal acquaintances
Accredited investors and hard money lenders

Private money lenders are suitable for the following

Private money lenders are very suitable for short term investors who want to compete with a short timeline of a cash buyer. On the other hand, private money lenders are also suitable for long term investors who want rehab a rental property before refinancing into a permanent mortgage.  Private lenders are very suitable for the following kinds of people.

Short term investors who want to purchase, renovate and sell a property within one year.
Short term as well as long term investors who want money quickly.
Investors concentrating on buy and hold who want to purchase and renovate a property before refinancing with a permanent mortgage.
Long term investors who do not qualify for a conventional mortgage

Private money lender loan amount and down payment

The private money lenders will usually loan out the money that is equal to a certain percentage of the property. That percentage depends on the LTV ratio or the ARV ratio.

LTV ratio is a loan amount that is based on a percentage of its initial purchase price. It is similar to the conventional mortgage. The ARV ratio is the loan amount that is based on the expected fair market value of the property after the renovations are done.

It is the common policy for any Licensed Money Lender to issue loans based on the LTV for a property that is in a good condition and ARV for a property that is in a poor condition.

Private money lender Interest rates, costs, and fees

The interest on the private money loan is assessed on the interest-only payments. This means that the private money borrowers pay monthly interest throughout the term of the loan and then make the full repayment at the end of the loan.

One big benefit with the moneylender like is that they aren’t amortized like a conventional mortgage. This makes the private money lenders a great option for the small investors who are looking to reduce the holding costs as they prepare a property for sale. This is a big advantage for the buy and holds investors as the monthly payments are not very huge.

Private money lender loan and approval time

Private money lenders will have terms that are anywhere from a month to 3 years to come. The approval and the funding times of a private money loan are as follows. The pre-qualification will take time as 3 minutes and funding as quickly as 10 – 15 days. This approval process will allow investors to compete with all the cash borrowers.

Private money lender loan qualification

Private money lenders will have predetermined standards for loan qualifications for their private money loans. Borrowers will have to submit the following to them to process it. They are the

A CV detailing experience and prior projects
Renovation scope of work
Contractor bids

Later, the borrowers will have to provide the purchase contract that stipulates the agreed purchase price and the terms of sale.

What to look into a private lender?

It is important to check the experience of the moneylender. Check their website and find out their years of service in the business and the number of loans they have issued so far and whether he/she is a Licensed Money Lender. Look for someone who has at least completed 100 deals like If the lender has experience in real estate, it is an added advantage. As a borrower, look for the interest rates provided and see whether it is the lowest in the market. However, do not decide just by this feature alone.