Things to consider when comparing lenders After you’ve looked at…
Sacramento Private Money Lenders
A lot of homeowners and real estate investors believe that retail banking institutions provide the only source of mortgage funding. Though retail banks provide the largest number or purchase and refinance loans, private money lenders serve several niches within the mortgage market that all homeowners and real estate investors need to be aware of. A private money lender helps when the loan scenario doesn’t fit the retail banking sector’s narrow standards. Private money loans are particulalry helpful when a deal needs to close quickly, a repair or rehab project is being contemplated, or the borrower is in financial distress.
What are private money loans
Private money loans are frequently referred to as hard money loans. They are granted by individual investors. The investors are people who have money they feel can best be used through loaning it to people who have valuable properties or wish to buy valuable properties.
As any real estate investor or homeowner in Sacramento knows, property in California’s beautiful capital is valuable and trending upwards. People love this city and its economy continues to thrive. That means real estate demand continues to strengthen.
Strong demand makes private money loans possible. Private money loans are based on the value of the underlying asset, not the borrower’s credit rating or income. This flexibility allows private money lenders to fund strong real estate transactions where conventional mortgage loans fall short.
Private money loans close in as little as 24 hours. The asset-based nature of the loans makes this possible. Because the loans do not require credit and income verifications, approvals are quick.
Conventional loans often take 30 to 60 days to close and fund. As real estate investors in Sacramento know, when you want to buy an investment property, you don’t have 30 to 60 days to get that loan. You need that loan approval today, or some other investor will be cashing in on your opportunity.
After repaired value loans
When you are looking for properties to fix and flip, private money loans are a necessity. Conventional loans are inferior because they base their loan amounts on a loan to value (LTV) ratio. This ratio uses the property’s current value, not the after repaired value.
For example, if a property’s value stands at $500,000, a conventional lender typically wants a down payment of 20 percent, or $100,000. If the property then needs $100,000 in repairs, that means the investor needs a whopping $200,000 cash!
Private lenders use the after repaired value (ARV). In this example, the property repairs will increase the value to $750,000. That means the private money lender can loan 80 percent of $750,000, or $600,000. This leaves the investor enough to make the repairs and flip that house for big profits!
Homeowners who need money to rehab or repair their own homes can use private money lenders as well. The ARV for their homes often provides them with enough value to fund restoration with a private money loan.
The asset value is important, not credit score
This makes private money loans an attractive option for borrower’s in distressed financial circumstances. Often, a job loss, medical condition, or other life event causes households to fall behind on their bills or acquire debt. This can make qualifying for a conventional loan all but impossible.
Borrowers in this situation qualify for private lender loans, provided that their property has sufficient value. In these cases, a private loan can assist with paying off debt, completing home repairs, or getting out of foreclosure.
If faced with these financial pressures, a private lender loan can provide the bridge over these troubled times. Private loans are meant as short-term loans that the borrower will keep for no more than a few years. Before the loan term expires, the borrower usually refinances or sells the property.
Private loans offer an alternative for borrowers whose circumstances place them outside of the conventional loan mold. They help borrowers close on loans quickly, manage debt, and even stop foreclosure.
Hard money lenders can be a great option for people looking for funding for short-term real estate purchases. They allow you to get your money quickly, often as little as a week, they can provide you with flexible terms and they don’t do a deep dive into your credit history, preferring instead use as collateral the value of the real estate purchase you’re buying. There are some pros and cons to think about when considering hard money loans.
Following is a small list of the reasons that you should consider a hard money loan:
You get the money really quickly.
Hard money lenders can get you your money in as little as a week, making it a great option for people taking part in fast-moving real estate deals. Traditional loans take much longer, meaning that you’d miss out on time-sensitive, potentially lucrative deals.
You don’t have to have great credit.
Money lenders look at the value of the collateral that you’ll be using, which is usually the property that you’ll be purchasing. They don’t look at things like your credit history or your credit score, making it ideal for people who have problems in those areas.
You get more flexible terms.
Because you’re directly dealing with the individuals or organizations that will be providing these loans to you, you have a better chance at negotiating terms that work with your situation.
There are several downsides to choosing hard money loans that you need to be aware of.
There’s not a lot of oversight in the industry.
The hard money lender industry is not really regulated. This means that unscrupulous lenders can take advantage of unsuspecting borrowers.
These loans can come with a lot of fees.
These types of loans usually come with a lot of fees, including origination fees early prepayment penalty fees.
These loans tend to have high interest rates.
Hard money lenders usually don’t disclose their interest rates amounts, but they’re frequently quite high. This can make a huge difference in the amount of money that you end up paying when the loan is due.
The loans have short terms.
Don’t have arms longer than a year or two. This means that at the end of the loan your property needs to be finished and ready to sell. If the market is down or the property is simply not selling, you’ll be on the hook for the amount of the loan.
Alternatives to hard money loans
Now that you see that there are pros and cons to hard money loans, you may be interested in finding out about alternatives.
Home equity loans
Home equity is the difference between you owe on your home and how much it’s worth today. You can take a loan out against this equity in order to finance a short-term real estate purchase.
Home equity line of credit (HELOC)
You can also use a home equity line of credit. This means that instead of getting the equity in one lump sum, the equity is available to you as a line of credit that you can use as needed.
Business line of credit
A business line of credit is a line of credit that you get from a bank or other financial institution that you can use for whatever purpose you see fit. In your case, you’d use it to find your short-term real estate purchase. Business lines of credit are difficult to get, and make sure that you have your financial and credit ducks in a row.
There are many other ways that you can get money to fund your short-term real estate purchase. At the end of the day, you want to make sure that you are choosing a fiscally responsible route. If you do choose to go the hard money lender route, make double sure that you’re prepared to settle up at the end of the loan period.