Private money lenders are essentially non-institutional lenders. Typically, they issue short-term loans that are normally meant for purchase of or renovation of an investment property. They also offer their money to those people looking for rehab project, cash-out refinancing and quick funding.
Their working process is pretty clear and simple wherein they secure all their loans by a real estate asset. You can use this loan for buying different properties such as:
- A house
- A condo or
- A multifamily building.
Ideally, the private money lenders are also called ‘relationship-based’ lenders simple because they can be anyone from your personal friend to a family member or even an established private lending company such as https://www.libertylending.com/.
However, when people think about these private lenders, they most typically refer to hard money lenders. This is because the hard money lenders also issue loans for a short-term and based on real estate that can be used for purchasing and renovating an investment property.
The three degrees
Much to the contrary of the common belief in people. Ideally, the private lenders can be technically of three different degrees. Each of these degrees is based on the rapport between the borrower and the lender. The three degrees of private money lenders are:
- Primary circle: This involves your family and friends
- Secondary circle: This involves your colleagues, personal and professional acquaintances and
- Third-party circle: This circle includes the accredited investors and hard money lenders.
Out of these three types of private lenders, the “third-party” private lenders are considered to be the furthest away from a borrower when it comes to relationship. However, all these three types of private lenders are considered to be the best and most reliable source for borrowing money because they have standardized interest rates, fees, costs, and loan terms.
Right for short-term fix and flippers
The private money lenders are just right for short-term fix and flippers who want to contest with the short timeline of an all-cash buyer. However, the private loan lenders are also right for a number of other people such as:
- The long-term investors wanting to rehab a rental property prior to refinancing it for a permanent mortgage or for preparing the property before refinancing
- The investors who are looking to purchase, renovate, and sell a property within a year
- The short-term and long-term investors who require quick funding
- The buy-and-hold investors or long-term investors who do not qualify for a conventional mortgage or 203(k) loan but have a plan on refinancing when they meet the requirements.
Therefore, private money lenders are ideally the best option for people looking for fast cash for purchasing or renovating a property irrespective of their purpose.
Rates and other features
It is also required to understand the features of private money lending. This involves the rates, terms, and qualifications that can vary widely since they can come up in different forms and shapes.
- Typically, a private money lender will offer a maximum loan amount up to 90% of LTV and up to 80% of ARV.
- The minimum down payment can be up to 10% or more of the LTV or up to 20% of the ARV
- The rate of interest may be within the range of 7 and 12%
- The lender fees and points can be between 1.5 and 10 points
- The term for a typical loan can be within 1 and 3 years
- The time for approval of such a loan can be as little as 3 minutes
- The time to funding can take anywhere between 10 and 15 days
In order to avail such a loan, you need to meet a qualification criteria of a minimum credit score of 550 and copies of your personal bank statements.
Interest rates and fees
The interest rates, costs and fees are the next thing that you need to understand. Ideally, the interest on such loans is assessed as interest-only payments. That means the borrowers will need to pay the interest every month throughout the term of the loan. In the end of the loan term they will need to make the full repayment along with the principal.
There may be a few lenders that may charge prepayment penalties if you pay off the loan before the due date but most of them will not allow you to pay early and reduce the holding costs.
- The interest rate may range within 7% to 13%
- The lender fees ranging between 1.5% and 10%
- The closing costs will be within 2% to 5% and
- The independent appraisal may be within $300 to $400
Typically, the monthly payments of these loans are not amortized as it is in the case of the conventional mortgage. However, the interest rates on such private money loans can be higher than the conventional mortgage and therefore the monthly payments can be actually less.
All these features and benefits make the private money loans a great option for people looking to reduce their holding costs while preparing a property for sale. This is primarily because the monthly payments do not cost as much as they look as compared to refinancing with a traditional mortgage alternative.
Selecting a private money lender
In order to select the right private money loans, you must start with asking the private money lenders the right questions. When you select a private money lender you should look for a few specific things such as:
- Experience: Check for the number of years they are in business as well as the number of loans they have issued, for both, more the better. Ideally, you will be better off when you work with a lender who has done more than 100 deals, Check for other relevant info directly on the website of a lender.
- Specialization: Also check for their specialization in real estate. Some may issue loans only on residential properties while others may specialize in offering loans for a patch of land. Few may also specialize in both residential and commercial properties.
Just make sure you work with a lender who specializes in the type of property you want to finance.