If you’re looking to purchase a rental property or flip a house (fix, renovate, and quickly sell), one way to fund this is through private money loans. These loans are a great way to get you going on your real estate ventures. However, like anything else, you should know all the pertinent information to decide if it’s right for you. So, what is a private money loan and when and how should you use them to lock in the real estate deal? Keep reading to find out more.
What Are Private Money Loans?
Private money loans are common among real estate investors. They’re also known as asset-based loans, offered by private parties, and tend to be short term. Private money loans were created for investors to loan money to other investors in a relatively quick fashion with less documentation and requirements than a traditional mortgage loan. The borrower’s credit rating is far less an issue with private money loans than with conventional financing.
Instead, the private money loan is based almost entirely on the value of the property and the borrower’s business plan. Instead of waiting a month or more and filling out a mountain of paperwork with a traditional loan, the private money loan is much faster, sometimes only days, with less required documentation.
What Is the Purpose of a Private Money Loan?
A private loan is used to quickly capitalize on an investment opportunity, whether it’s new development or a fixer-upper. They’re not cash loans, but they allow for quick access to capital to get a deal closed sooner. Private money loans are preferable primarily because they’re much faster, and there’s a lot less upfront documentation and paperwork required. Funding is usually available in days, instead of weeks or months.
Quickly accessing funds can mean the difference between locking in a real estate deal or missing out on it. The short-term nature is perfect, as the buyer can renovate and flip the property quickly and move on or take the time to secure long-term financing for rental property. The convenience and quickness come at a price, however. The rates, fees, and other costs can be significantly higher than traditional loans.
What Are the Requirements for Private Money Loans?
These requirements can vary wildly as private individuals or companies offer them with far fewer regulatory requirements. It’s their money, so they determine the terms. This also means the terms are negotiable, so don’t be afraid to try to get very favorable terms for you. Lenders will need to know how reliable you are, especially if this is your first go-around with a private money loan.
You may need to show some financial and investment history information along with your detailed plan on how you intend to make money on the property. Also, a larger down payment may be required, along with a thorough property valuation. Once history is established, future loans will be much easier and quicker.
What Are the Loan Rates and Points for Private Money Loans?
When referring to private money or any other real estate financing, points are fees charged by the lender as a percentage of the value of the property purchased. Typically, the points charged on a private money loan are in the 2% to 4% range. Again, the rates can vary greatly and depend strictly on what the lender wants to charge. With that being said, a private money loan usually has a fixed interest rate in the neighborhood of 10% to 15%.
What Are the Benefits of Private Money Loans?
Private money loans can be appealing for a variety of reasons, including:
Quick Approval and Funding
The good deals don’t wait for anyone. They will go to the first person who can come up with the money, so having access to funds within days or even hours ensures that you won’t lose out on a deal because of having to wait months for funding.
More Lenient Collateral Requirements
If you’ve ever done a traditional mortgage, you know there’s a litany of documents that need to be either collected or signed. A real estate investor doesn’t want to be tangled up in a traditional mortgage loan’s long and arduous process. The private money option is usually the better choice to get things done quickly.
Negotiable Terms and Conditions
There’s inherently more flexibility in a private loan, as it’s ultimately the decision of the private party. The terms are generally hashed out in a private one-on-one meeting and often consist of customizing the loan terms and conditions to the buyer’s needs.
Borrowing From a Local Source
Banks are typically national or even international corporations and thereby lack personability and the ability to analyze the transaction to see if it makes fiscal sense and instead rely upon stringent requirements. Meanwhile, a private loan is usually funded by a local party that wants to see successful real estate investments for those in their area.
The fees a bank applies to your mortgage are outlined in the mountains of documentation you receive and sign, but they’re often not disclosed upfront. Instead, they’re hidden within the documentation and not known until repayment begins. Private money lenders are usually more upfront, making all fees and costs known explicitly.
Credit Score Is Irrelevant
Private money lenders typically only look at the value of the property and the business plan for the property and require only a deed of trust to be signed as collateral when the loan is secured. Credit score and income often aren’t a factor and usually, neither is the borrower’s history. The viability of the project is far more important than anything else.
Beat the Competition
With the near-immediate availability of funds and terms and conditions that are amenable to you, a private money loan allows you to act fast and capitalize on the deals that are favorable to you, putting you ahead of your competitors.
Receive a Private Money Loan From Titan Funding
Closing a real estate deal is challenging, and financing is usually the biggest headache. With private money loans, you can alleviate that headache with a more straightforward, speedier service that allows you to close in short order. If you’re interested in learning more about private money loans or are ready to start the application process, reach out to the experts at Titan Funding. We offer several private money loan options to fit your needs. You can reach us at 855-928-0737 or via our secure online contact form to get started.