Far to often, homeowners with properties in need of repair or rehab lack the funds needed for an expensive construction project. They may feel that they have to live with whatever problem is affecting their property. They may forego a rehab that could substantially enhance their property value. They may even sell their property at a discount.
No one should be forced to sell their home because they cannot afford repairs. After all, you put the money into buying the home. Why shouldn’t you benefit from the increased value that the repairs yield?
Whether you need to complete an addition, roof repair, plumbing work, or other type of repair and rehab project, private money lenders provide the means.
How private money lenders differ from retail banks
Private money lenders are individual investors, not retail banking institutions. They are people just like you. They have money to lend. They are looking for an investment opportunity, and your rehab project may just be it!
Because they are private lenders, they are free to set their own lending criteria. Rather than basing their lending decisions on rigid criteria, like credit scores and income ratios, private lenders base their decisions on the deal. If the numbers for your project work, you get the loan. This means that you wont be held back by your credit profile!
Why private money lenders are better than retail banks when it comes to repair loans
Often, retail banks try to keep their customers in a box. If a loan request doesn’t fit an exact criteria, they reject it. They do this because they want to approve mass numbers of loans based on formulas. As you know, one side doesn’t fit all.
Retail lender trap
When you need money for a home repair, retail lenders are often unhelpful. They hesitate to give loans based on the value of the property after the repairs are completed. They base loans on a loan to value (LTV) ratio.
For example, a retail lender may be willing to provide a loan at 80 percent LTV. They use the current, before-repair value; therefore, if the property value is $100,000, they are willing to lend just $80,000, providing no money for home repairs.
Unless you have a large amount of cash on hand, securing a loan through a retail lender does nothing to help you get the project done.
How private money lenders provide the solution
Private money lenders have the flexibility to use the after repaired value (ARV), instead to the retail lender’s LTV standard. ARV differs from LTV because it allows the loan amount to be based on what the value of the property will be once work is completed. This means the money needed for a construction project can be included in the loan proceeds.
For example, a home’s current value may be $100,000. After the rehab work is complete, the value will rise to $150,000. This is the after repaired value. A private money lender will then be able to give a loan of 80 percent of $150,000, or $120,000. This provides the money needed to complete the repair or rehab.
Private money loans provide a bridge
Private money loans provide short-term financing to get projects done. Once the project is completed, the borrower can then refinance the property into a conventional mortgage. Private money loans are designed for periods of 6 months to a few years.
The payments for private money loans remain affordable despite their short terms because they utilize balloon payment features. In this type of loan, the borrower’s monthly payments are comparable to conventional loan payments for the loan term, and then the remaining balance comes due. For example, in a one-year private loan for $100,000, the borrower might make monthly payments of $1,000 for 12 months, at which point the remaining principal comes due. The borrower would refinance the loan prior to the end of the term, after he has competed the repairs and increased the property value.