Private Money Lenders vs. Conventional Lenders
If you are looking for a short-term loan to purchase and rehab your investment property, then borrowing from a private money lender or hard money lender may be better than a conventional loan.
Hard money lenders are private individuals or groups of individuals that make loans secured by the property with 30 to 50 percent equity so that their investments are protected. Conventional loans require more paperwork and financial institutions must follow traditional lending guidelines.
Private lenders do not have to adhere to lending guidelines. They can choose who they want to work with and are more concerned about the property value, making a high rate of return on their investments and typically don't care about your personal credit history.
Conventional loans require the borrower to do the following:
Here is what you should know about private money lenders:
1. A residential private money loan is funded based upon the value of a specific piece of property as opposed to traditional loans you obtain from financial institutions that look at your credit, tax returns and income statements.
2. Private or hard money loans have higher interest rates and lower loan to value ratios.
3. Private money lenders are private investors and not financial institutions. They do not have to adhere to lending guidelines.
4. Private money loans are short term loans that are used for purchasing and rehabbing real estate and the loans close quickly within a week or two.
5. They offer investors/buyers more flexibility in loan terms.
6. Most private money lenders want safe investments with high rates of return.
7. Private lenders usually lend in their area and will want to inspect the properties they are lending on to make sure the investments are sound.
8. You may have to pay a prepayment penalty. Read the loan documents carefully and ask questions to make sure you understand the loan terms.
Reasons Why You Should Obtain a Private Money Loan
Where to Find a Private Money Lender?
Always get a referral for a private money lender form another investor, your mortgage broker, your Realtor® or your attorney. If you are unable to find a private money lender through a referral, then check on the Internet or newspaper. Be sure to verify references and read all the documents carefully so there are no surprises later.
Since financing is tougher to get these days, you should investigate all financing options and take advantage of short-term private money loans to purchase your foreclosure or short sale properties and rehab them.
Hard money lenders are private individuals or groups of individuals that make loans secured by the property with 30 to 50 percent equity so that their investments are protected. Conventional loans require more paperwork and financial institutions must follow traditional lending guidelines.
Private lenders do not have to adhere to lending guidelines. They can choose who they want to work with and are more concerned about the property value, making a high rate of return on their investments and typically don't care about your personal credit history.
Conventional loans require the borrower to do the following:
- Submit a deposit, which is credited toward the purchase price
- Complete a loan application
- Document their income by providing income tax returns, W-2's or 1099's, bank statements, paycheck stubs and financial statements
- Purchase fire and hazard insurance
- Evidence of additional income such as rental income, social security, pension and disability income, child support or spousal support income
- Name of the condo or homeowner association
- Explanations for gaps in employment
- Gift letters if the funds are from a donor
Here is what you should know about private money lenders:
1. A residential private money loan is funded based upon the value of a specific piece of property as opposed to traditional loans you obtain from financial institutions that look at your credit, tax returns and income statements.
2. Private or hard money loans have higher interest rates and lower loan to value ratios.
3. Private money lenders are private investors and not financial institutions. They do not have to adhere to lending guidelines.
4. Private money loans are short term loans that are used for purchasing and rehabbing real estate and the loans close quickly within a week or two.
5. They offer investors/buyers more flexibility in loan terms.
6. Most private money lenders want safe investments with high rates of return.
7. Private lenders usually lend in their area and will want to inspect the properties they are lending on to make sure the investments are sound.
8. You may have to pay a prepayment penalty. Read the loan documents carefully and ask questions to make sure you understand the loan terms.
Reasons Why You Should Obtain a Private Money Loan
- Need cash quickly to close on your purchase or to complete your rehab.
- Credit problems preventing you from qualifying and obtaining traditional financing.
- Gives you more freedom to choose a rehab property quickly and flexibility on the loan terms.
Where to Find a Private Money Lender?
Always get a referral for a private money lender form another investor, your mortgage broker, your Realtor® or your attorney. If you are unable to find a private money lender through a referral, then check on the Internet or newspaper. Be sure to verify references and read all the documents carefully so there are no surprises later.
Since financing is tougher to get these days, you should investigate all financing options and take advantage of short-term private money loans to purchase your foreclosure or short sale properties and rehab them.
