If you are looking for loans, you have probably heard of private money loan and are wondering what this form of lending is all about.
Private money loans are common in real estate investment. That said, private money loans are a quick solution for financing or refinancing a real estate investment. Especially if you don’t quality for traditional financing or don’t have time to go through the many hoops at a bank or other traditional lender.
Read on to learn more about private money lenders and how they can help you with your investments.
What is a private money loan?
A private money loan is typically a short-term loan that is used primarily for real estate investment acquisitions.
Loans are granted by private lenders or organizations. Private money lending is not subject to the same regulations that govern other lenders, but this does not mean that it is completely unregulated. Private money lenders must comply with state usury laws that limit the amount of interest that can be charged. They may also be limited in the number of loans they can make.
In terms of timing, terms are usually about 12 months. Although the loan term can be extended from 2 to 5 years. The amount a borrower can obtain through a private money loan is, of course, based on the value of the property in question. This may be a property that the borrower already owns or a property that the borrower wishes to acquire.
Features of a private money loan
- Interest rates on private money loans are usually higher than those of licensed lenders. They vary between 15% and 20%. If it is a loan from a friend or relative, the interest rate is usually lower.
- Payments on private money loans may be interest-only for the term of the loan, with a single balloon payment at the end.
- The qualification for a private money loan is different from the qualification for a regular loan. And this may have a financial point of view as in the borrower’s credit history or score.
- The terms of private money loans are usually short, from 6 to 12 months, or in some cases up to 5 years.
- The lender may require a written plan outlining how the borrowed money will be spent.
Pros of Private Money Lending
Good option for new real estate investors – Private money loans are a great option for those who want to be part of the real estate investment world and need a loan to do so.
Private money loans are more flexible than traditional financing – Private money lenders are more willing than others to finance the acquisition of distressed properties in need of major repairs.
They are fast – The flexibility of private money loans also makes them faster and this limits the possibility of missing investment opportunities and gives you a head start on your potential fix and flip project.
No prepayment penalty – You can repay the loan as quickly as you wish without penalty.
Limited credit and income requirements – Private money lenders focus primarily on the potential profitability of a real estate purchase rather than your creditworthiness or financial history. This is a big advantage if you have any bad marks on your loan history.
Payment may be interest-only – Private money lenders often allow you to make interest-only payments throughout the repayment period, which can be very useful if you only plan to have the loan for a short period.
Cons of Private Money Lending
Higher interest rates – This can make it difficult for borrowers to make a profit on transactions. Also, since the loans are usually short-term, the borrower needs to be able to sell or refinance the property relatively quickly, before the loan matures.
For investment properties only – Private money lenders only make loans on investment properties, so they are not suitable for owner-occupied purchases.
Extension fees – Private money lenders can grant loan extensions but borrowers will have to face extension fees. Therefore, it’s best to stick to your repayment windows.
If you need more information on how to obtain a private money loan, do not hesitate to contact our team at customerservice@myfci.com. We will advise you on the right, quick and easy process to potentially obtain financing for your next project.
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