Private money loans (also called hard money loans) are loans offered by individuals or organizations to an individual or company. Unlike the more conventional loans, private money loans entail more risks for both the lender and the borrowers. However, these loans have less “red tape” and restrictions.
Because of the higher risks involved in private lending, it is common for a private lender to charge a higher-than-usual interest rate. Private money rates generally range from 10 to 15 percent. The rate is determined by looking at the loan-to-value (LTV) ratio (maximum LTV ratio may be anywhere from 50 percent up to 70 percent), strength of the borrower, condition or desirability of the property, lien position, and actual borrower cash-in contribution or owner equity. Although the rates for private money loans are higher than conventional loans, private money loans are quickly available when other lending sources are not.
Private money lenders may have nontraditional qualifying guidelines. However, they are not exempt from banking laws, although they may be exempt from routine regulations. They also need to comply with state and federal usury laws.
What Does a Private Money Loan Offer:
- Private money lenders generally provide greater flexibility with regard to the types of loans and circumstances under which money will be lent.
- The qualifications of a borrower are considered. However, private money lenders give more importance to the strength of the borrower’s collateral.
- Private money loans are generally quick to obtain because income verification and appraisals are seldom required.
- Private money loans tend to be more expensive than institutional loans.
- Private money loans are often short term (in most cases, the maximum term is five years).
Private money is used for all types of real estate secured financing such as restaurants, hotels, and homes.
There is a prevalent notion that private money lending is generally for desperate borrowers who are in trouble and left with no options. The truth is borrowers of private money are generally individuals or businesses that have solid resources but whose needs do not fit well into the strict regulations associated with institutional lending. They are also borrowers who need speed of flexibility which cannot be found in institutional lending.
The most common reason why some people choose private money loans over traditional lending sources that charge lower interest rates is the speed of funding. Under certain conditions, private money loans can only take twenty-four hours, but normally within two weeks. Institutional lenders, on the other hand, usually take more than thirty days (residential), ninety days (commercial) and one hundred eighty days (development, construction) to fund a loan.
If you want speed of funding and less rigid regulations, then private money loans may be the right choice. Contact me for assistance. I’ll be happy to help.