While unknown to consumers, many investors rely solely on private lending to purchase properties. Private lending might be a fit for your business as well. If you’ve never worked with a private lender, this article can help you understand what to expect in NE.
We have put together a few things you should know about private lending. Ii may not work for everyone, but for real estate investors, private lending can be just the thing they need to see great profits.
How does private lending really work?
Expect a less stringent and faster approval process
The main attraction of private money loans is the ability to qualify easily and quickly. Compared to traditional, or qualified, mortgages, private lenders focus on your project instead of your personal credit and income (though minimum standards often apply).
A private money loan is typically secured by the property being purchased. That’s why lenders can offer loans to people with lower credit scores, allowing them to flip a home without sufficient cash. If the lender sees a solid deal, they will be quick to finance. They will also provide honest feedback on the deal. Since they’ve seen many succeed and fail, they can be great mentors in finding the right deals.
Expect to repay the loan quickly
A traditional consumer mortgage will take around 30 years to repay. Private money loans generally have a short term of months, not years. The project needs will be considered in developing the terms, but most loans are 3-9 months. Extensions may be allowed, but are usually limited.
Remember that private lenders aren’t banks and they need their capital back quickly so they can lend it again. This is ideal for house flippers. You get quick access to the cash you need and expect to pay it back quickly.
Expect a higher interest rate
Economics works with supply and demand. With easier underwriting and a quick turn around, private money lenders are able to earn a higher interest rate. Depending on your experience and the deal, expect the rate to be more than double bank rates. That isn’t actually a big problem if you are paying the loan back quickly.
If you expect to hold the property for more than a couple of months, you should evaluate if a traditional bank loan or line of credit would be a better fit.
For investors looking for short term loans, private lending offers a great balance of a higher rate in exchange for the speed and convenience they receive. Underwriting traditional loans can be a long and drawn-out process–by the time your financing is approved, the property you were after could be gone.