According to www.forbes.com, banks are responsible for rejecting almost 85% of the entrepreneurial loans, and this is why they are shifting to private loans. A private money lender is a non-institutional lender, who is responsible for issuing the loans of short-term for the purchase as well as the renovation of a certain investment property. He is also referred to as the hard money lender. The private money lenders are responsible for offering loans to long-term investors, who are looking forward to investing money in rehab projects, cash-out refinancing, and quick funding.
How a private money lender works
A private money lender is responsible for offering the loans, which are normally secured by the real estate assets. These kinds of private loans are used for purchasing houses, multi-family buildings, or condos. A private money lender can be your friend or any established lending company, and this is why he is also known as the relationship based lender.
However, when a particular person is thinking about a private lender, he is referring to a hard money lender. The reason behind this is that the hard money lenders are responsible for issuing the loans of short term, which are used for purchasing and renovating a particular investment property. A hard money loan is ideal for the long term and short term investors.
Technically, private lenders are of three degrees. These degrees are based on a relationship between a borrower and a lender. The different degrees of private money lenders include:
- The primary circle, which comprises of the family members as well as close friends.
- The secondary circle, which comprises of personal acquaintances, professional people, or even colleagues.
- The third party circle, which comprises of the hard money lenders and the accredited investors.
A hard money lender is the third party lender, who is away from the borrower, especially when the relationship is considered. No matter what, a hard money lender is definitely the best private lender because you can rely on them and they also have a standard rate of interest, fees, costs, and also flexible loan terms. A hard money lender also has a short and long-term, which ranges between 1 or 3 years, rates of interest vary between 7% and 12%, and the fees of the lender are known to vary between 1.5% and 10%. On the other hand, the primary and secondary private lenders are known to have loan terms, costs, and rates, which vary to a great extent.
Who is a private money lender appropriate for?
A private money lender is appropriate for the flippers and fixes who are interested in competing with the short timelines or the cash buyers. However, a private lender is also appropriate for long-term investors. These investors are interested in rehabilitating rental properties before refinancing them into permanent mortgages. A private money lender is appropriate for the following kinds of people.
- Fix and flippers, who are looking forward to purchasing, renovate a property and sell it within a year.
- Long-term and short-term investors who require quick financing.
- The buy and hold investors who are looking forward to purchasing as well as renovating a certain property before they are refinancing with the conventional mortgages.
- A long-term investor who cannot qualify for the conventional mortgages, home-style renovation mortgages, and who are interested in seasoning the properties.
A private lender is also responsible for issuing the loans to the short-term investors who are looking forward to making a certain sum of money by flipping the houses. A private lender is also responsible for issuing the rehab loans along with the hard money loans for the buy and hold investors, who want to purchase or renovate a certain rental property. To know more, you can visit https://www.libertylending.com/.
Interest rates, fees, and costs associated with private money lenders
The rate of interest on private money loans is normally assessed as interest-only payments. This also means that a private money borrower has to pay interest at the end of every month during the complete loan term and then make the entire repayment when the loan ends. Some of the lenders are also responsible for charging the prepayment penalties, in case if a loan is cleared off before the payment date.
- The interest rate is known to vary between 7 and 13%.
- The fees of the lender vary between 1.5 – 10%.
- The closing costs vary between 2 and 5%.
- The independent appraisal varies between $300 and $400.
Monthly payment is not amortized like conventional mortgages. It is true that the rates of interest on private money loans can be higher in comparison to conventional mortgages, but it is also true that the monthly payment is going to be lesser. This is what makes a private money loan an extremely safe option for the fix and flippers, who are looking forward to reducing the holding cost when they are preparing a particular property for selling. It is also advantageous for the buy and hold investors because the monthly payments do not cost a lot when they are looking forward to refinancing with the conventional alternatives.
The loan term and the time for approval
A private money loan is known to have a term, which ranges from a single month to a period of 3 years. However, when a borrower works with the private lender like the hard money lender, the loan term ranges 1 year to 3 years.
Most people do not know that a hard money lender can also have the prepayment penalty. A prepayment penalty forces the borrowers to complete all the interest payments for each and every month.
The funding and the approval time of the private money loans are:
- Prequalification: 3 minutes.
- Funding: 10 to 15 days.
This permits each and every investor to compete with an all-cash borrower, and close on the houses quickly.
Conclusion
It is extremely important to know in details about a private money lender before you decide to take a private loan from them. Ensure that you educate yourself about the rates of interest and the various other terms and conditions that are associated with private loans. Educating yourself is going to help a lot when you opt for private money loans.