Private money loans have become a popular alternative to traditional bank financing. These loans are used for real estate transactions and can cover the cost of buying or renovating a property.
Private money lenders will typically lend up to 70% of the property’s value, allowing you to get more funding than if you were using traditional financing options like a home equity line of credit (HELOC).
What is a Private Money Loan?
A private money loan is a short-term loan that’s used for real estate transactions. As the name suggests, this type of financing does not require a credit check or collateral. Instead, it’s based on personal relationships between borrower and lender.
In other words, if you have someone willing to lend you money without securing their investment with anything other than your promise to pay them back. Then at some point in time (the more reasonable term here being “promissory note”), you may be eligible for such an arrangement.
The government does not back private money loans. Therefore, they’re not regulated by any federal banking authority like Fannie Mae or Freddie Mac when they make mortgage-backed security available to investors looking for low-risk returns on their investments.
Because there are no regulations governing them specifically—and because they aren’t easily accessible through conventional lending channels like banks—private lenders can charge higher interest rates than traditional mortgages (although still lower than payday loans).
Who are Hard Money Lenders, and What Do They Do?
A hard money lender is a private individual who lends their own money to borrowers. This can be done through a business they own, or they may be investors looking for a better return on their money than a traditional bank will provide.
Private money lenders have flexibility in lending because the same rules do not bind them as traditional banks.
According to California private money lenders, such as Pacific Private Money Inc., “unlike conventional loans, which are offered based on your ability to repay debt and your credit history, private money loans are offered based on the value of your collateral – the real estate you intend to purchase with the loan.”
Instead of following strict guidelines regarding credit scores, FICO scores, and other factors which affect your ability to obtain financing from many lenders, hard money lenders don’t care about any of that.
They only want to know if you have sufficient collateral backing up your loan request so that if you default on your payments (which happens more often with private lending), the lender can still recoup their investment.
Because these lenders can be so flexible, they can often offer loans at a lower interest rate than traditional banks. This is because they don’t have as many expenses associated with running their business, so they can pass those savings on to borrowers.
What is a Bridge Loan?
Bridge loans are short-term financing for various purposes, including real estate transactions and property closing. They’re also used to help buyers qualify for a mortgage.
Bridge loans can be used to close on a property when the purchase price is less than the home’s value or if there are other issues with getting traditional funding (such as bad credit).
Unlike traditional mortgages, bridge loans tend to have higher interest rates because they’re riskier investments than long-term mortgages.
They’re also more likely to require the borrower to make a larger down payment.
Why Would You Need a Private Money Loan?
There are various reasons why you might need a private money loan. The most common use is to buy real estate, whether it’s the home of your dreams or a rental property you plan to develop. If you’re in the market for a new house, these loans can help bridge the gap between what you have to spend and what the lender is willing to lend.
A second everyday use is to renovate or improve an existing property—for example, by adding on or replacing an old kitchen with something more modern and energy efficient.
Another reason people turn to private money loans is that they want better terms than those offered by traditional banks. While there are some things that banks won’t do (like allowing people with bad credit scores), there are other things they’re willing to do but charge exorbitant rates for doing them. This includes:
- Refinancing mortgages.
- Paying off outstanding debts.
Paying down personal loans on car purchases offers better terms through private lenders at less cost than through large financial institutions.
Private money loans are a great way to finance real estate transactions. If you are looking for funding for your next project, consider this alternative financing option before turning to traditional banks or credit unions.
When comparing private money loans against other options, be sure that the lender is willing to work with you and give you what you need regarding terms and rates.