When a Private Money Loan Makes Sense

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There are some situations where getting a private money loan or hard money financing can make sense for some borrowers. A private money mortgage is typically funded by a single private investor or a group of private investors. A private money borrower usually secures the loan through the value of the property and not their personal credit. Therefore, these types of loans may be referred to as equity-based loans. Rather than giving the private money lender financial documents and credit reports, the borrower may provide detailed information about the property and a large down payment. This can be enough in some cases to secure a private money loan.

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Why Private Money Loans?

Some borrowers may opt for a private money loan because they do not qualify for a conventional loan to buy a house. They may also want to use a private lender because the process to get the money is faster than traditional mortgage underwriting.

Borrowers who may want to get a private money loan include borrowers who are not able to qualify for a traditional loan due to their credit history, employment or other factors. Second, many property flippers use private money loans to get the cash they need quickly to repair the home and sell it at a profit (ideally). Third, some homeowners who are facing foreclosure and have equity in their home may turn to a private money lender to get a short term, higher interest loan. This may be the only option to keep the borrower in the home.

Borrowers who do not qualify for a traditional 30-year mortgage can be for many reasons. A common situation is where the person is recently divorced, missed payments on credit cards or mortgages and has a damaged credit score. Now they need a new loan in their own name, but their credit has been tarnished. Another reason is many self-employed borrowers have difficulty documenting their income sufficiently to get a regular mortgage. Many self-employed borrowers who take tax write offs for everything could have the income to afford a mortgage, but their tax returns do not reflect their level of income. A private money loan could be their best option.

A home owner who is facing foreclosure and has equity in the property may be able to get a private money loan. While this carries disadvantages such as high fees and interest rates, it is usually preferable to losing the home outright. A private money lender could consider lending in this situation if they are confident that if the home owner does not pay and the loan goes into default, they can sell the home, pay off the loan and still get a profit from that transaction.

Depending upon your situation, getting a private money loan can be a good or a bad move. Here are the pluses:

  • These loans are available to people with equity in their home but cannot get a regular mortgage.
  • The money can be had in as little as a few days with little underwriting and checks of credit
  • Few financial disclosures

On the down side of private-money financing:

  • The interest rate is a lot higher than a 30-year mortgage, possibly as high as 15% or 18%.
  • The processing fees can cost you up to three points or more.
  • You may have a prepayment penalty for paying off the loan early.
  • The down payment could be as high as 30%.

If you are a home owner or a potential home owner and are considering a private money loan, you may want to consider it if you do not have any other options. It can work in the short term to get you into the home, or to keep you in the home.

However, you will be paying a very high interest rate that does not normally make economic sense for the long term. The best option is to get the private-money mortgage and then to work on establishing credit or improving your credit as soon as you can. If you do so, you might be able to pay off the private money loan and get a regular mortgage.

About Tom Murphy

Tom Murphy grew up in La Jolla, California surfing and carving his niche in the local real estate market. Mr Murphy has a stellar record as a loan officer with over a decade of experience helping people secure the right home loan.