Private Mortgage Loans Provide

Private mortgage loans are made by private lenders rather than traditional financing sources such as banks, lending institutions, or government agencies. These hard money or asset-based loans are typically made for short periods (6 months to 3 years), and the lender's decision is made based on the equity and market value of the asset offered as collateral rather than the borrower.

Professional real estate investors who would not otherwise be eligible for traditional financing and want to buy, renovate, or withdraw equity from an income-producing property can use these loans as a funding source. Private mortgages also help real estate investors who need quick funding without the financial documents required by traditional financial institutions.

Private home loans are very safe as they represent as much as 65 to 70 percent of the value of the income-producing property. On non-income-producing properties, a maximum loan-to-value of 55 percent is provided. In this low-interest rate environment, investors expect to pay interest rates of 12 to 14 percent on first loans and 16 to 18 percent on second loans. Historically, the first right has gotten six points more than the premium.

Why borrow private money?

When interest rates of 14 to 18 percent are added to four to eight points, the borrower pays more than 20 percent annually for a private mortgage loan. That's a good deal for private mortgage lenders, but why would borrowers want to pay these high rates when conventional mortgages range from 7 to 10 percent?

There are many reasons for this, but they all fall into four categories.

Closing speed. Conventional mortgages typically take between 45 and 90 days to finance, as institutional lenders need to assess the property's value, conduct a detailed review of the borrower's credit history, and thoroughly review the borrower's current financial situation.

It needs to be reviewed. The loan approval process moves much quicker because less information about the borrower is required. After all, the property is the main factor determining loan eligibility. Private mortgage lenders are protected by lending at significantly lower.

LTV ratios: 65 percent versus 80 percent versus 90 percent for institutional lenders. Also, a private mortgage lender can decide within 24 hours of receiving information, while institutional mortgages must be approved by a lending committee that meets only twice a month.

Easy application process. Although a borrower's lack of up-to-date personal financial information may invalidate or at least delay an institutional mortgage approval, it should not affect the ability to obtain a private mortgage loan. Private mortgage lenders frequently base their choices on the property offered as collateral.

Suppose the property's value is high enough, and its income is sufficient to pay the interest on the loan. In that case, the borrower's financial situation should not influence the private mortgage lender's decision.

Other sources of money are not available. A borrower may not qualify for an institutional home loan for reasons ranging from a low credit score to too much borrower debt. Also, the property may not match the borrower's loan type: many institutional lenders will lend at least $500,000. They won't issue a second lien, even if the property has significant equity.

In these cases, private mortgage lenders may be the only available source. Institutional lenders are concerned with the appraised value of the property and the credit of both the borrower and the property. However, private mortgage lenders only care about the appraised value as long as it represents fair market value. Therefore, if a property generates or can generate enough income to pay off the Note and the property's value will provide enough equity, the borrower's credit is not an issue for the private mortgage lender.

More funds are available. Because private mortgage lenders lend based on the property's value, the borrower can borrow more and put less equity into the property. In these cases, the borrower is not penalized for buying the property at a significant discount from the market value.

Investment Parameters

The LTV ratio is the most critical factor that private mortgage lenders consider when assessing a loan application. On undeveloped real estate or uncultivated land, they typically lend up to 50%. Sixty-five percent in commercial properties, like office buildings, shopping centers, and warehouses, and 70 percent in multifamily properties that generate income, like apartment buildings. The maximum loan amount will typically be granted if all requirements are satisfied. A lower loan amount may be given if the loan or borrower is deemed less than ideal.

The second factor is the type of property being lent, which is frequently decided by how easily the property can be disposed of in the event of default. A multi-tenant, income-producing office building is more desirable than a single-use property that will take a year to sell.

The asset's cash flow or income potential as collateral constitutes a third investment criterion. The monthly interest payments must come from somewhere, even though many private mortgage lenders are independent in this area. If the property generates cash flow after all costs are paid, the income alone can pay the bills each month without the borrower having to come up with any additional money. This increases the Note's level of security significantly. Cash flows from other income-producing properties may be used instead of those from the collateralized asset.

Since most private mortgage loans are short-term, private mortgage lenders want to ascertain whether a particular exit strategy is feasible. Refinancing the property is an illustration of an exit strategy. In that situation, the lender must decide whether the borrower has a high enough credit score to be approved for a long-term mortgage and whether the property's cash flow is adequate to pay the debt. The home must satisfy the basic requirements set forth by mortgage lenders who are most likely to refinance the home.