Borrowers with low credit scores or those who have had foreclosures, bankruptcies, or short sales in recent years can find limited options when looking for real estate financing. For this reason, some private money lenders are offering an alternative to regular banks for these types of borrowers. Because these loans are kept in the lender’s portfolio rather than sold on the secondary market, they don’t have to adhere to the same scrutiny that government-backed loans do.
Private Money Lenders (sometimes also hard money lenders) will often place more weight on the value of the collateral, cash flow of the property, and borrower over personal credit histories. Given that the lenders are looking mostly at the collateral as security, these types of loans often require higher equity on the property. Private lenders will often cap their loans at 65%-70% of the value of the collateral and in the case of income-producing properties may often require the property service the debt (at a minimum).
Private Lenders often charge a higher rate because the loans tend to be higher risk (less than stellar borrowers) but often can move considerably quicker than a regular lender. Oftentimes, borrowers that qualify for bank financing use Hard Money Loans or private money because they need a quick closing, to then turn around and refinance with better terms once they have secured the property.
Private money lenders also have the flexibility to offer creative financing solutions such as interest-only payments or extended loan terms.
These types of loans can be used for a variety of real estate investments such as fix and flips, construction projects, or even bridge loans. They are often seen as a last resort option due to their higher rates and shorter terms, but can also be useful in certain situations. For example, a fix and flip project that requires quick financing to purchase the property and complete renovations before selling it for a profit may benefit from using a private money lender.
Moreover, private money lenders can also be a valuable resource for borrowers with poor credit or those who don't meet traditional lending qualifications. In these cases, private money lenders may be more willing to overlook credit scores and focus on the potential of the property and borrower. This can be especially beneficial for real estate investors who may have multiple ongoing projects and need reliable funding sources.
