Often business owners, rental housing investors or fix and flip entrepreneurs prefer borrowing funds for their investment projects from private lenders rather than going to the bank. Speaking briefly, private money loans (aka Hard Money loans) can be defined as interest-only loans, secured by a real estate property. The interest rates of private lending are generally higher than the banks’ rates; however, there are a few vital advantages of this type of financial service. Below we have outlined the seven key benefits of the private money loans.
1 Quick Screening and Pre-Approval Process
Private investors are quick decisions makers and so your loan application can get a “green light” very quickly. Unlike banks, where it takes a while before you receive an answer/approval, private money loans tend to be approved in 24 – 48 hours. If so, you will receive a Letter of Interest from the Lender where the term, the amount of the loan approved, interest rate, broker fees, origination fees, early payment penalty (if applicable), estimated time to close, etc. should be listed.
2 Time to Close/Fund the Loan
“Time is Money”. Brokers and private investors understand that most of the borrowers need the funds quickly and so they work diligently with escrow/ title officers to assure deals are closed in a timely manner. If a loan documents package is dully signed and all supporting documents are in compliance your loan can be funded in up to 7 business days.
3 Less Paperwork, No 1040s or W2s Required
Keeping a good record of your business and tax information is always highly recommended, but it can happen that important documents were lost/ damaged or for some reason you have failed to file your taxes. To approve a loan, bank institutions require such documents from the borrowers, whereas private investors are interested primarily in the value of the real estate asset.
4 No Up-front Fees
With private money loans, the borrowers do not need to worry about up-front expenses. All affiliated costs as loan documents fees, taxes, origination and broker points are handled through escrow. All you need is a U.S business bank account where the funds will be wired to. Usually brokers charge between 1 and 3 points for a funded loan.
5 Poor Credit
Things are not always perfect and so might be your credit score. Institutional lenders will decline a loan application if the borrower’s credit score is not promising. Private investors will generally approve if the number is above 620 but even if score is lower they will consider. If the value of the property is there and the loan amount is within the reasonable Loan to Value (LTV) ratio, your application will most likely get approved promptly.
6 Short Term
The long mortgage terms of the banks are not everyone and private money loans are the best option for these borrowers. The term of such a loan can vary from six (6) to thirty six (36) months.
7 No Appraisal Required
Last, but not least, unless there is a significant discrepancy in the value stated by the property owner and the lender’s estimate, no property appraisal will be required.