4 Situations That Require A Private Money Loan

Most real estate investors and property owners have heard of private money loans and private money lenders, but not everyone understands the purpose and when they should be …

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Most real estate investors and property owners have heard of private money loans and private money lenders, but not everyone understands the purpose and when they should be utilized. Private money loans are provided by investors who have private sources of cash (as opposed to funds from a bank) they are able to lend when the borrower is able to use real estate as collateral.

When considering whether or not provide a private money loan, the private money lender is primarily focused on the property’s value and the borrower’s equity in the property. The borrower’s credit and income history are not the main focus as with traditional lenders like credit unions and banks. At least a 25% down payment (or existing equity) in the property is usually required by the private money lender.

Here are 4 common situations that require a borrower to seek a private money loan:

Need for quick approval and funding

Most traditional lenders such as banks take a minimum of 45 days to approve a loan request and provide funding. Private money lenders are able to give loan approval and fund the loan in about a week if needed. In a real estate market with many buyers and few sellers, if a buyer’s bank lender pulls out during escrow, there will likely not be enough time to secure a new bank loan and save the deal before escrow is scheduled to close. In this situation the seller could simply contact one of their back-up offers and move forward with a different buyer. A private money lender would have been able to step in and save the deal with a fast approval and funding.

The borrower’s record has recent issues

Recent issues on a borrower’s can prevent them from obtaining a bank loan for many years depending on the specific situation. Banks will not loan to borrowers with recent short sales, foreclosures, low credit scores or a bankruptcy. This leaves the borrower with very few financing options. Private money lenders can overlook these types of issues and instead focus their attention on the equity and property value. Once some time has passed the borrower may be able to refinance with a bank loan.

The borrower lacks adequate employment history or is self-employed

Another situation that may require a private money lender is for a self-employed borrower or a borrower who has less than the often required 2 years of employment history at their current position that banks want to see. Borrowers are often shocked to find they have been denied by the bank because of these circumstances as they may have sufficient income to service the loan they are requesting. A private money loan can still be provided to borrowers in these situations.

The loan is for a real estate investment

Real estate investors consistently used private money loans for many different types of real estate investments and projects. A typical use of private money loans are for fix and flip loans when an investor buys, repairs and sells a property for a profit. Traditional lenders do not like to lend for these types of investments which cause the real estate investors to turn to private money lenders.

Veteran real estate investors are very comfortable using private money lenders as a quick and reliable source of funding. This allows the real estate investor to offer a faster close and shorter escrow, which makes the offer more competitive to the seller than other bids, helping investor acquire the subject property.

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