Private Money Lending 101
Updated: Jan 7, 2019
Have you ever heard the term Private Money Lending and found yourself wondering what it means? Perhaps you've been intrigued, or even just a little intimidated? Don't worry, you're not alone.
There are a lot of misconceptions about private money lending and why people use it. So, to begin our weekly informational series here at Geneva Lakes Funding, we thought we should help clear up the confusion. This week we're going to dive into what private money lending is, and next week, we'll follow up with why people use it.
Simply put, a private money loan is a short-term loan secured by real estate. It's called "Private Money" because the loan is secured by a hard asset - the real estate/property. Private money loans are funded by private investors (or a fund of investors) as opposed to conventional lenders, such as banks or credit unions.
The terms of these loans are usually around 6-12 months. However, the loan term can be extended to longer terms depending on the circumstance. As far as payment structure goes, private money loans are a bit atypical, as the loan requires monthly payments of only interest or interest and some principal with a balloon payment at the end of the term. Perfectly suited to many rehabs and house flipping scenarios.
Here at Geneva Lakes Funding, we set up our loan to be interest only payments with a balloon payment at end of the loan. The amount the private money lenders are able to lend to the borrower is primarily based on the future value of the subject property. At Geneva Lakes Funding, we lend up to 65%-70% of the ARV or After-Repair Value. The property may be one the borrower already owns and wishes to use as collateral, or it may be the property the borrower is acquiring.
Although credit is still of some importance to our lenders, private money lenders are primarily concerned with the property’s value rather than the borrower’s credit. Borrowers who cannot get conventional financing due to a recent foreclosure or short sale can still obtain a private money loan if they have sufficient equity in the property that is being used as collateral. Private money loans require more financial commitment from borrowers than bank loans, but not without reason. Lending on the future value of a property is considerably riskier than lending on credit, and private money lenders have to protect the funds for their capital investors. Thus, most private money lenders require origination fees of 2-5 "points" (a point is 1% of the loan amount) at closing, and interest rates from 11%-14%.
Here at Geneva Lakes Funding, we charge 2-4 points and 11%-13% interest only payments. The pricing of each loan is determined by several factors including the type of property, the market condition of the area the property is located in, the experience level of the borrower, and more.
To learn more about how to obtain a private money loan for your future real estate endeavor, email us at firstname.lastname@example.org, or call (262) 222-6400 to schedule a consultation. Or, stay tuned for our post on How Private Money Lenders Lend.
Thanks for reading - we look forward to hearing your thoughts below!