Taking loans cannot be under emphasized when talking about real estate investment. In fact, more than 90% of the world’s successful real estate investors and developers do deals with loans. That shows the importance of money lending to real estate business. There are two types of lenders: the conventional lenders (banks, credit unions, government-backed institutions etc.) and the private or hard money lenders. Here we are going to be discussing everything about private money lending. So without wasting time, below are everything you should know about private money lending.
Private money lending is a short-term non-institutional loan offered by private investors or individuals for the purchase or renovation of a real estate property. It is commonly known as hard money or peer-to-peer lending and it’s an alternative to conventional institutions (like banks and credit unions). Unlike conventional loans, the loan is secured by real estate property and it can be used to buy condos, multifamily buildings, houses, and other commercial or residential properties.
Because of its unconventional characteristics: speed, low requirement, quick preapproval time and fast funding, private money lending can also be known as the “loan of the last resort.” This means that it is the best alternative for those who do not meet the traditional underwriting requirement of the institutional lenders or who want a short-term loan to buy a property. Without any more ado, let’s discuss the fundamentals of private money lending and how to go about the lending process.
Just like the traditional lending institutions, private moneylenders also offer different types of loans. If you want to borrow from the private lending institutions, it is very important to know about the loan types available. So, below are the types offered by the private moneylenders.
The bridge loan is a short-term loan, typically between two weeks to three years pending the time the long-term mortgage is approved. It serves as an interim financing to fill the gap between the purchase of a property and the time it takes to prepare it for use. For example, when you buy a property, it takes sometimes before conventional lenders accept the application and release fund. The bridge loan offers quick money to the investor and makes the deal possible.
With refinancing loans, borrowers can refinance an existing mortgage in a short time for a greater amount. Since most borrowers do not qualify for a loan from traditional lenders (banks, credit union etc.) due to the stringent loan parameter, private moneylenders are the best alternative. This loan type is established for those who need quick cash to refinance a mortgage but do not qualify to take a loan from traditional lenders. So, if you are an individual in need of cash to refinance a project, apply for a refinancing loan.
Funding a new construction project can be very difficult even for the most qualified borrower because taking a loan for this type of project seems to be riskier than already built structures. So, banks and other conventional lenders are more careful and provide a stringent criterion to qualify for a construction loan. If you plan to build a brand new residential or commercial complex like multifamily home, the ground up construction loan is designed to meet your need. It provides you with the funding you need from start to finish.
This loan type is available to property flippers – people who buy, repair and sell to make a profit. It can be very difficult for even the most qualified buyers to secure a loan from conventional lenders when buying a residential or commercial building. This is because the traditional lenders have stricter criterion and sometimes do not offer loans for this type of transaction.
So, if you are buying a property that requires an all cash or hard money, the fix and flip loan is your best choice. Apart from having less stringent criterions, private lenders can finance up to 80% of the principal amount. It also does not require prepayment fee, which means you can sell the property anytime you want without paying any penalty.
The Buy and hold loan is the best choice for individuals who want to invest in rental property. As it is essential for buy-and-hold investors to act fast when an opportunity arises, this loan type provides investors with quick cash to compete with other investors in the market. So, if you are looking to make a profit or want to build a real estate portfolio when the market is strong, apply for the buy and hold loans. The application, appraisal, and approval can be accomplished in less than a week.
The Non-conforming loans are the type of loans that do not meet the criteria of lending. Reasons for situations like this include the collateral backing it, the use of the fund, lack of sufficient credit or the loan amount is more than the conforming loan limit. If you are in situations like this, visiting the private moneylender is the best option. Their flexibility makes it possible for investors to receive funds for any type of deal, although you might be required to submit detailed collateral and documentation during the process.