When most people seek lending for a real estate purchase, they start with a traditional lending institution like a bank to get approved for a mortgage loan. However, a bank loan might not be the best option for every borrower even if the rate is much lower.
For starters, banks have all kinds of red tape criteria that can really slow the process down for a real estate investor. In addition, many self-employed individuals find it very difficult to get financing when tax returns might show lots of write off’s and so forth. And there could be credit issues that delay or deny the approval process.
If you’re unable to secure a traditional loan because of a poor credit history and/or rating, or you can’t gain approval because of the type of property you want to purchase, the answer may lie with private money lenders. Here are some of the benefits to be gained from using this resource.
Private money lending is more interested in the asset than requiring perfect credit or income from the borrower. In addition, they focus on investment properties and make it easy for an experienced investor to acquire distressed or value add real estate deals quickly. Whether you want to flip houses, purchase rental units to oversee, or build a strip mall, banks simply may not be interested in financing these types ventures.
This is where private money lenders step in. Finding private investors online can be pretty easy, but finding a private lender you can trust is another story. We recommend that you work with a BBB approved private money lender (hard money lender) to ensure that you will have a good experience. Make sure to check their reviews and ratings online.
Damaged Credit May Not Always Harm You
Credit is important, but it does not always tell the whole story. Whether its bankruptcy, divorce, business failure or the like, life circumstances can set anyone back. When it comes to getting loans from private money lenders, you’ll find that collateral and a business plan is more important than credit. The first thing a bank does when you apply for a loan is check your credit. If you are found to be less than worthy due to a low rating, black marks, or poor credit history, your application will likely be denied.
This is not necessarily the case with private money lending. While these lenders may check your credit, it probably won’t weigh heavily in the decision to give you a loan. What matters more is that you have some cash or collateral to work with and that you have a solid plan to make money so that all investors in your project see a return. They want to see strong equity and a strong exit strategy.
Whereas banks can string you along for several weeks with requests for various financial documents before approving or denying a loan, a private money lender could secure approval in as little as just a few days. Again, this is because approval relies more on the merit of your plan to purchase property, the asset itself and the ability to turn a profit.
If you’ve purchased an investment home before, think about the process of making a bid. If you walk in with loan approval, you’re definitely ahead of buyers that haven’t yet applied for or been approved for mortgage loans. Yet, you could find yourself losing out to savvy buyers that swoop in with cash in hand.
In truth, this is happening more and more in the real estate market, although it generally isn’t families looking for homes that show up with cash. It’s investors like you looking to turn a profit by flipping a house or turning it into a rental property.
With private money lending the terms are usually negotiable. The caveat, of course, is that this type of lending will feature higher interest rates and points. However, if you are in and out of the property quickly (and your plan worked) the interest rate costs are minimal in relation to your profit. Typical loan to values are 70% of the final market value of the property. Interest rates can range from 9% to 14%. Points from 2-5%.