Private or hard money lenders are non-institutional lenders that offer short-term loans. Private money lenders such as the invoice factoring type, provide soft loans to short-term fix and long-term investors who are looking for quick funding. As opposed to conventional lenders such as banks, hard money lenders are funded by private investors. The loan terms are often about 12 months but can be extended to around five years. The loan requires that you make monthly payments of only interest and a massive sum at the end of your term. The amount that you can borrow depends on the value of the subject property. The property can be one that you already own and wishes to use it as collateral or one that you are acquiring.
Private money lenders are concerned with the value of your property rather than your credit. If you have a low credit score and cannot obtain conventional financing, you can still secure a hard money loan if you have valuable property. Here are three things that you should know about private money lenders.
Since people will differ with the type of property they own, most conventional lenders may specify what you can and cannot use as collateral. However, a borrower can use any property to secure a private loan. You can use a family residential, multi-family residential, land, or even your business. Some private lenders may specialize in a particular property type if they do not have experience in other areas. Most lenders will want to work with collaterals they are most comfortable with to avoid any complications. Always ask them upfront the type of property they are willing to take.
Not all deals are ideal for hard money loans. For instance, if you are buying a primary residence with good credit and income history, bank financing is the best option if you have the time to through the lengthy loan process required by banks. You should consider taking a hard money loan when the bank is not an option or when you need quick cash. You can opt to go for private investment for situations such as fix and flips, land loans, construction loans, or if you have credit issues.
The interest rates charged by private money lenders depend on the lender and may also vary depending on the region. For example, private lenders in California have lower interest rates and points compared to other parts of the country because there are many hard lending firms in California. The competition forces lenders to reduce the price to lure customers. Compared to conventional banks, hard money firms charge a higher interest rate. The risk involved with hard money loans is higher than in traditional banks. The interest rates for private money lenders range from 10-15 percent depending on the lender. However, the interest may vary depending on the loan to value ratio.
If you are looking to secure a hard money loan, do not let the high-interest rates to scare you away. The benefit of receiving your credit quickly and obtaining financing when all the banks have rejected you will outweigh the extra cost.