Let’s talk about private money loans and what are the benefits and disadvantages that they may have.
These loans are backed by the value of the property and since the property itself is used as the only protection against default by the borrower, hard money loans have usually lower loan-to-value (LTV) ratios than traditional loans.
We need to keep in mind that private money loans are not made by banks, but by individuals who are probably aiming to make some business. Who is their target? People who are looking for short term financing and borrowers with poor credit but great equity in their property.
In Real Estate it’s very common the case of property flippers who get properties with private money loans, renovate them and resell them in a short period of time for a price that pays off the loan easily.
When it comes to apply for a Private Money Loan, it can be much quicker than with traditional loans, as private investors who back the loan usually make faster decisions than banks based on the value of the property. Lenders love these type of loans, as it’s a win-win for them. In case the borrowers defaults, there may be a better opportunity to resell a property. They don’t need to be afraid about not receiving their payment.
Private money lenders might not use traditional underwriting process, which can allow for adjustments to be negotiated regarding the repayment schedule for the loan. This could afford the borrower more opportunities to pay back the loan during the window of time available to them.
The costs of hard money loans to the borrower are traditionally higher compared with financing available through banks or government lending programs. The increased cost is a tradeoff for faster access to capital, less stringent approval process and the higher risk that the lender is taking by offering up the financing.
So that’s all for today, hope you found this article useful so far and don’t hesitate in reaching me out if you have any questions or need a consultation.